Problem Set 8 MONOPOLY The following table shows the three topic sections of this chapter and the associated study guide problems that pertain to each topic section. Section Topic 1 Pure Monopoly Problems M1-M8, S1-S2, L1-L3. 2 Pure Competition Versus Pure Monopoly Problems M9-M15, S3-S5, L4-L7. 3 Monopolistic Competition Problems M16-M20, S6-S9, L8-L10. Multiple Choice M1 A monopolist faces a demand curve that is The same as the total market demand.Horizontal.Perfectly inelastic.Very stable, not greatly affected by economic changes.Relatively elastic. M2 As a rule, the monopoly price will be As high as the monopolist wants.Greater than marginal cost.Greater than average revenue.Lower than marginal revenue.Equal to long-run average cost. M3 In the long run, a monopoly will earn positive economic profits due to Free entry into the industry.Downward sloping demand.Its ability to raise price at will.Barriers to entry.Its horizontal LAC curve. M4 Which of the following is not a barrier to entry? Control of resources.Economies of Scale.Being first to market.Patents and Copyrights.Answers a, b, c and d all are entry barriers. M5 Due to its market power, a monopolist can Set both price and quantity for the product.Select any price-quantity combination along the industry demand curve.Maximize profit by setting price equal to long-run cost.Pass along all cost increases to buyers.Answers c and d are both correct. M6 If the demand curve is downward sloping, the monopolist’s marginal revenue curve is Above the demand curve.Always above its average cost curve.The same as the demand curve.Always below the marginal cost curve.Below the demand curve. M7 A monopolist maximizes profits by producing at a price and output where P = MC.P = AC.MR = MC.AC is at a minimum.Answers c and d are both correct. M8 The monopoly market structure leads to Price that equals average cost.Quick responses to economic change.Price that equals minimum long-run average cost.Continuing economic profits.Efficient levels of production. M9 Hypothetically, if all firms in a perfectly competitive industry were to merge and act as a single supplier, Industry output would decrease and price would increase.Industry output would increase and price would decrease.Both industry output and price would decrease.Both industry output and price would increase.No change would occur. M10 In a monopoly, deadweight loss reflects The loss in consumer surplus relative to perfect competition.The inefficient production methods used by monopolists.The higher price consumers pay relative to perfect competition.Diseconomies of scale.The net loss in total welfare (the monopoly profit minus the loss in consumer surplus) relative to perfect competition. M11 In the long run, an increase in fixed cost will cause total output to Fall in both a monopoly and in a competitive industry.Fall in a monopoly and to be unchanged in a competitive industry.Increase in a monopoly and fall in a competitive industry.Be unchanged in a monopoly and fall in a competitive industry.Be unchanged in both a monopoly and in a competitive industry. M12 A cartel may be described as a number of producers Fully merged into one entity.Agreeing to compete on equal terms.Removing all trade barriers among themselves.Conspiring to corner the entire supply of a market.Who agree to coordinate price decisions and the production levels of all members. M13 A cartel can achieve the monopoly outcome by Agreeing on a common price.Virtue of controlling the majority of industry supply.Limiting total output and adhering to member quotas.Promoting demand for its scarce output.None of these answers is correct. M14 A natural monopoly may occur if Average cost falls throughout the relevant range of production.Marginal cost falls throughout a large range of production.Average fixed cost falls throughout a large range of production.Industry demand is very inelastic.Marginal revenue exceeds marginal cost for a large range of production. M15 In a natural monopoly with AC = 100/Q + 25 and P = 50 – Q, There is no need to regulate the price.The usual regulated price is P = $45, implying Q = 5.The usual regulated price is: P = $30, implying Q = 20The usual regulated price is: P = $37.5, implying Q = 12.5None of these answers is correct. M16 In the long run, firms under monopolistic competition will tend to charge a price Approximately as high as the pure monopoly price.Equal to LAC but greater than LMC.Identical to the perfectly competitive price.Equal to the minimum value of LAC.None of the answers above is correct. M17 The major difference between monopolistic competition and perfect competition is the Size of the typical firm.Magnitude of long-run profits.Cost structure of the typical firm.Degree of product differentiation.Number of firms in each industry. M18 In general, the greater the degree of product differentiation The less elastic is the demand curve.The more elastic is the demand curve.The smaller is the firm’s profit.The more intense is competition.The greater the chance of customers switching suppliers. M19 In most cities, there are a large number of qualified physicians. Physician services are personalized – that is, people do not see all physicians as identical. Besides price, factors such as age, sex, location, and personality influence the choice of physician. Thus, the market for physician services is best described as Perfectly competitive.An oligopoly.A regulated monopoly.Monopolistically competitive.A market marked by price discrimination. M20 In a monopolistically competitive industry, firms Earn zero economic profits in the short run and in the long run.Can earn positive economic profits in the short run but zero profits in the long run.Can earn positive economic profits in the short run and in the long run.Will always enter the market in the long run.Answers b and d are both correct. Short Problems and Questions S1 Determine the profit maximizing output and price of a monopoly, if market demand is given by P = 6,000 – 10Q, and total cost is C = 500 + 5Q2. S2 List five types of barriers to entry that may lead to monopoly. S3 In pure competition, there are no economic profits in the long run. In pure monopoly, the dominant firm typically earns a positive economic profit. Explain this difference. S4 Economists object to monopolies on grounds of efficiency. Why is this so? Explain. S5 Cartels are inherently unstable. Explain carefully why this is so. S6 Briefly discuss the characteristics of monopolistic competition that distinguish this type of market structure from monopoly and perfect competition. S7 If there are economic profits in monopolistic competition in the short run, what will happen? Explain. Draw an appropriate diagram to illustrate your answer. S8 A firm under monopolistic competition faces the demand curve: P = 500 – 12.5Q. The firm’smarginal cost is MC = 200 + 5Q. a. Find the firm’s profit-maximizing output and price. b. Assuming that the firm is at its long-run equilibrium position, estimate total revenue, total cost, and total profit. S9 Explain why advertising may make sense in monopolistic competition but not in perfect competition. Longer Problems and Discussion Questions L1 A monopolist faces the demand curve: P = 8,400 – 3Q, and has long-run average cost LAC = 900 – 3Q + Q2. a. Derive equations for revenue, marginal revenue, total cost, and marginal cost. b. Determine the monopolist’s profit-maximizing output, price, and profit. L2 A monopoly has carefully estimated industry demand. Its revenue projections for different levels of sales are listed in the following table. In addition, it estimates its total cost to be: C = 20 + Q + Q2, Complete the table and determine the profit-maximizing level of output. OutputRevenueTotal CostProfit190 2160 3210 4240 5250 6240 7210 8160 990 100 L3 A monopolist faces the demand curve: Q = 20P-2 = 20/P2. Marginal cost is $5 per unit. Find the monopolist’s profit-maximizing price. (Hint: You can find price directly after recognizing that the demand curve is a power function as described in Chapter 4.) L4 Industry demand for a good is given by: P = 60 – .5Q. The industry’s long-run cost is $10 per unit: LAC = LMC = $10. a. A monopolist controls the industry. Find its output and price. b. Instead, suppose that the same industry is perfectly competitive. Find the long-run equilibrium price and output. Comment on the differences between the monopoly and competitive results. How much worse off are consumers under monopoly as compared to perfect competition? L5 A 5-member commodity cartel faces the demand curve: P = 60 – .4Q. Each member can produce output at (constant) LAC = LMC = $20 per unit. a. Describe how the cartel should operate to maximize its total group profit. b. Under the group profit-maximizing cartel agreement in part a, one member produces 10 units of output. It is tempted to secretly increase its output to 20 units. Assess this strategy and comment on cartel stability. L6 In 1981, a Boston-based gas station owner set the highest gasoline prices in the nation. During that summer, he charged $1.69 per gallon for unleaded gas during the daytime and $2.59 per gallon at night, when other downtown gas stations were closed. Adjusting for inflation and changes in crude oil costs, these would be roughly equivalent to 2012 prices of $5.00 and $7.50 per gallon, respectively. How might the owner profit by setting different prices night and day? b. Suppose that, during the day, the station owner’s demand is given by: PD = 2.06 – .00025QD. The marginal cost of selling gasoline is $1.31 per gallon. At his current $1.69 price, he sells 1,500 gallons per week. Is this price-output combination optimal? Explain. c. The station owner sells an equal number of gallons at night, setting PN = $2.59. Suppose elasticity of demand is EP = -3. Is this price profit maximizing? d. The station owner is able to sell gasoline day and night at high prices. Why aren’t there more gas stations in downtown locations in major cities? Explain. L7 In the U.S., the “business” of intercollegiate sports is controlled by the NCAA and generates significant profits for that organization and its member universities. The NCAA controls the number and terms of scholarships given to student athletes, the schedules of regular season and tournament games, and negotiates the terms of TV and radio contracts for major sports such as football and basketball. In what ways does the NCAA act like a monopolist? Explain briefly. L8 In an editorial praising capitalism, The Economist wrote: “It is competition that delivers choice, holds prices down, encourages invention and service, and (through all these things) delivers economic growth.” What kind(s) of competition (market structures) does the writer seem to be discussing? L9 Firms that are monopolistically competitive try to erect barriers to entry but are often unsuccessful. Explain why, and give examples from the U.S. economy. What happens when a firm fails to block entry? L10 In an article in The New Republic, Steven Waldman argued: “Choice leads to inept consumption. The more choice available, the more information a consumer must have to make a sensible selection. When overload occurs, many simply abandon the posture of rational Super-Consumer.” How does this relate to monopolistic competition and consumer welfare?
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