Price theory

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Answer

Price Discrimination

is charging different prices to different consumers, when the cost of production is the same.

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First-degree price discrimination

is also known as perfect price discrimination

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What is not an example of price discrimination

A restaurant has a fixed cover charge in addition to menu charges.

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With perfect price discrimination

each customer pays a different price based on willingness to pay.

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Under what situation is efficiency reached?

a perfectly price discriminating monopolist.

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The local zoo has a pricing policy in which senior citizens pay a lower price than do younger adults. This policy is

a form of third-degree price discrimination.

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With perfect price discrimination, a monopolist

will charge each consumer a different price.

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A perfectly price-discriminating monopolist

sells the last unit of output where price equals marginal cost.

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Comparing a regular monopoly with a perfectly price discriminating monopoly gives the fol-lowing conclusion.

The regular monopolist will impose a greater efficiency loss.

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Block pricing by utilities is an example of

second-degree price discrimination.

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With block pricing, firms differentiate price according

to the quantity of output purchased.

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With block pricing, consumers typically pay

less for additional quantities of output.

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Frequent flyer or shopper programs become a form of

third-degree price discrimination.

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Consumer surplus is fully extracted by firms under

first-degree price discrimination.

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Under first-degree price discrimination the marginal revenue curve

is the same as the firm’s demand curve.

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Arbitrage

is resale of a product among market segments.

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Which of the following conditions is needed for a monopolist to charge different prices in each of two different markets?

the inability to purchase and resell output between the two markets.

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Price discrimination is more common for firms selling services than for manufacturing firms because

it is easier to prevent resale of a service than of a manufactured product.

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What is not a prerequisite for producing third-degree price discrimination?

knowledge of each buyer’s willingness to pay for output

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Which of the following is needed for successful price discrimination?

The firm must have a positive Lerner index.

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We would expect price discrimination to be most successful in the market for

haircuts.

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We would expect price discrimination to be least successful in the market for

jeans.

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Successful price discrimination requires prevention of resale because

multiple prices for the good or service cannot persist otherwise.

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A price-discriminating monopolist should divide sales among markets so that

marginal revenue is the same in all markets.

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A profit-maximizing monopolist that sells output in two distinct markets (A and B) will be in equilibrium when

MR in market A = MR in market B = MC

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When a profit-maximizing monopolist sells output in two distinct markets,

Price will be lower in the more elastic market.

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With third-degree price discrimination,

price will be higher in the market with the less elastic demand.

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With third-degree price discrimination and two markets with differing demand elasticities,

price will converge in the two markets if resale is possible

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Imposing a per-unit tax on a perfectly price-discriminating monopolist will

reduce its output.

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With second-degree price discrimination and a constant marginal cost, a monopolist

should increase profits when consumer demand is downward-sloping.

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Comparing a price-discriminating monopolist with an ordinary, single-pricing monopolist, we tend to find that price discrimination

typically increases total output.

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A two-part tariff is a form of

second-degree price discrimination because average price falls with quantity purchased.

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A two-part tariff involves

a fixed entry fee plus a fixed per-unit price.

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Which of the following is the best example of a two-part tariff?

an entry fee followed by a constant per-unit price

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With a two-part tariff, consumers pay

an “average” price per unit of output that declines with the quantity purchased

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With a two-part tariff and consumers with identical demand curves, the profit-maximizing monopolist will

capture all consumer surplus.

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With a two-part tariff and consumers with identical demand curves, the maximum entry fee

is equal to total consumer surplus.

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Under a two-part tariff with many consumers having different demands, the profit-maximizing monopolist

does not have a clearly defined profit-maximizing pricing scheme.

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With intertemporal price discrimination

groups are charged different prices according to the time of purchase.

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Intertemporal price discrimination is a form of

third-degree price discrimination

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With peak-load pricing, a firm charges a different price

in each period, since its marginal cost varies in each period.

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With peak-load pricing,

a firm can reduce its total cost by reallocating its production.

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With peak-load pricing, total costs are apt to be reduced as

consumers switch their demand from periods of high cost to periods of low cost.

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Peak-load pricing is typically introduced when

production costs vary in different time periods.

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The efficiency gains from peak-load pricing depend largely upon

the ability of users to cut back on consumption during peak periods.

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Under peak-load pricing, the price in each period is set

where marginal cost intersects demand for that period.

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Charging different prices to different customers

is price discrimination if the production costs are the same.

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If Amazon.com were to charge each customer a different price for the most recent Harry Pot-ter book, depending on that person’s past purchases, it would be trying to

engage in first-degree price discrimination.

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Even if the three conditions necessary for price discrimination are met, a firm may not profit-ably price discriminate because

the costs of discovering customers’ willingness to pay and of preventing resale might be high.

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Which of the following is a not a way Americans arbitrage price differences in prescription drugs between Canada and the U.S.?

requesting a rebate from the U.S. government for the price difference

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Under a two-part tariff, a firm

charges an entry fee and a constant per-unit price

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Which of the following is an example of price discrimination?

Aaron purchases a hardback copy of Harry Potter and the Deathly Hallows for $25, while Barbara waits and purchases a paperback copy of the same book six months later for $8.

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Economists generally view price discrimination favorably because

its practice eliminates much deadweight loss.

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Which of the following is not necessary for a firm to effectively price discriminate?

The firm must have some idea of consumers’ income.

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Suppose a book publisher faces two different markets, market A where the price elasticity of demand is 6 and market B where the elasticity is 1.5. If the marginal cost of producing a book is $10, how should the firm price its book?

Price in market A = $12, and price in market B = $30.

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Economists have supported charging higher tolls for use of roadways during rush hours. This form of pricing is referred to as

peak-load pricing.

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Should it choose to price discriminate, the firm with market power

decreases the deadweight loss relative to charging a single profit-maximizing price.

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Which of the following is the best example of intertemporal price discrimination?

releasing movies on DVD six months after their movie theater release

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Price discrimination is

selling the same good or service at different prices.

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Monopolistic competition is characterized by which of the following: (i) free entry and exit, (ii) differentiated product, (iii) few sellers?

(i) and (ii)

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A monopolistic competitor differs from a perfectly competitive firm in that

it faces a downward sloping demand curve.

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For a monopolistic competitor who is maximizing profits,

average revenue exceeds marginal revenue.

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A monopolistic competitor who is maximizing profits will choose quantity such that

marginal revenue equals marginal cost.

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The “monopolistic” element of monopolistic competition is due to the fact that

the firm, facing a downward sloping demand curve, has some control over price.

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The “competition” in monopolistic competition is likely due to

free entry.

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Monopolistically competitive firms operating in long-run equilibrium have been criticized for having excess capacity. This criticism relates to the fact that

the firm does not operate where price is equal to marginal cost.

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Monopolistically competitive firms earn zero economic profits

in long-run equilibrium only.

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Product differentiation is associated with

monopolistic competitive firms, but not perfectly competitive firms.

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The monopolistic competitive firm faces a downward sloping demand curve. This means that

the firm has some degree of monopoly power.

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The monopolistically competitive firm is in many ways like the competitive firm. However, it is unlike the competitive firm in that

it sells a differentiated product, whereas the competitive firm does not.

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Long-run equilibrium for the typical monopolistically competitive firm is characterized by

price equal to average cost at the chosen level of output.

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The demand curve that a monopolistically competitive firm faces is

downward sloping but fairly elastic.

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Monopolistic competition is inefficient in that

firms fail to produce at the lowest possible average cost. firms produce where price is greater than marginal cost. firms produce with excess capacity.

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Most economists would not advocate government intervention in monopolistically competi-tive industries because

the product variety produced by monopolistic competition is a benefit that helps offset its relatively small welfare costs.

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For a monopolistic competitor, excess capacity is the difference in output

at minimum of LAC minus where MR intersects LMC.

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If an excess profits tax is imposed on firms, the model of monopolistic competition predicts that

there will be no change in output or in price.

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Long-run equilibrium in monopolistic competition is characterized by

an output rate associated with a tangency between the demand curve and the average cost curve.

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The industry under monopolistic competition is characterized by excess capacity because

entry occurs until zero profits are made, which implies that each firm is producing to the left of the minimum point of its average cost curve.

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Long-run equilibrium in a monopolistically competitive market is characterized by all of the following except

price equal to marginal cost.

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For a monopolistic competitor, the excess capacity of the firm is smaller

the more price elastic the demand for its product.

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Government intervention in monopolistically competitive industries is probably not warranted because

regulation may require costs above any deadweight loss.

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An oligopolistic industry can be characterized by all of the following except

many sellers.

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A duopoly is an industry

with two sellers.

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There is not an agreed upon model of oligopoly because

mutual interdependence makes it impossible to develop one strategy that is optimal in all situations.

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In a Cournot duopoly with linear market demand and constant and equal marginal costs, the industry output will equal

2/3 of the output of perfect competition.

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Oligopolistic firms are distinguished from monopolistically competitive firms in that oligopo-listic firms

exhibit a strong mutual interdependence and monopolistically competitive firms do not.

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The key element in the Cournot model is that each firm determines its

output based on the assumption that the other firm will not change its output.

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In the Cournot model, the reaction function shows

one firm’s most profitable output level as a function of the output chosen by the other firm

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A significant criticism of the Cournot model is that

its key assumption is not met if the market is still adjusting toward equilibrium.

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The main assumption of the Cournot model

is more plausible the larger the number of firms in the industry.

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In the Stackelberg model of oligopoly,

a leader firm selects its output first, taking the reactions of follower firms into account.

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In the context of the dominant firm model, if the elasticity of market demand is 1, the domi-nant firm’s market share is 0.5, and the elasticity of demand of the competitive fringe is 4, then the dominant firm’s elasticity of demand is

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In the context of the dominant firm model, if the elasticity of market demand is 0.75, the do-minant firm’s market share is 0.25, and the elasticity of demand of the competitive fringe is 2, then the dominant firm’s elasticity of demand is

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For the same demand and cost conditions, total output with a Stackelberg model is____ and price is ______ than with a Cournot model.

higher; lower.

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For the same demand and cost conditions, compared to a Cournot duopoly, a Stackelberg leader earns a______ profit and a Stackelberg follower earns a_______ profit.

higher; lower.

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Which model is the best description of the real world?

It depends on the particular industry and market under consideration.

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In an oligopolistic industry where the dominant firm acts as the price leader, smaller firms

face perfectly elastic demand curves.

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In an oligopolistic industry where the dominant firm acts as price leader, the dominant firm

faces a residual demand curve that determines its marginal revenue.

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Under oligopoly, each firm

must be concerned with the reactions of other firms to any price or output decision it makes.

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The Cournot model of oligopoly

shows how uncoordinated output decisions of rivals could interact to produce an equili-brium between the competitive and monopoly equilibrium positions.

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The Stackelberg model differs from the Cournot model in that

the Stackelberg model assumes one firm learns the reaction curve of the other firm and acts as leader.

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In the dominant firm model, the dominant firm goes about setting its price by assuming that the other firms

behave as competitive firms.

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The dominant firm establishes price in the market by

finding a price on its demand curve consistent with an output rate that makes its marginal revenue equal to its marginal cost.

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At the price chosen by the dominant firm, output by the dominant firm is determined by

letting the other firms produce as much as they wish. The dominant firm then produces enough to satisfy the residual market demand.

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In the dominant firm model, when the share of industry output produced by the dominant firm

is none of the above. Dominant firm’s output share does not indicate how close total out-put is to the competitive result.

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A market that is first characterized by oligopoly and then becomes cartelized is a market that

had interdependent firms that then entered into an agreement to coordinate their decisions on price and output.

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If OPEC is treated as the dominant firm and the world demand for oil falls then

OPEC will produce less output; non-OPEC producers will produce less; price will fall.

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In an oligopolistic market setting, a cartel is more likely to succeed if

the number of firms in the industry, is small.

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An ideal cartel will

set price equal to the monopoly price.

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A cartel in industry X will find it most difficult to

prevent entry of other firms to the industry.

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Which of the following is not a reason why cartels fail?

Cartel members face a low price elasticity of demand for their product.

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Suppose a tomato cartel were formed. Which of the following would not be likely to help the cartel maintain its position?

a price ceiling at the competitive level

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If a cartel member violates the cartel agreement and sells at a price below the cartel price,

the violator faces a very elastic demand curve for the additional output.

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OPEC has been a successful cartel. Which of the following reasons did not contribute to its success?

a high supply elasticity of crude oil by non-OPEC producers

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Assume that a group of countries that produces 50 percent of the world’s coffee limits its cof-fee exports to increase its income from sales abroad. Which of the following would be most likely to contribute to the success of the cartel?

inelastic demand by coffee importers; inelastic supply from other coffee producers

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Which of the following contributed to the stability of OPEC for so many years?

Only a few members accounted for most of the oil reserves of the cartel.

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The Internet may actually result in higher prices for consumers

if the availability of information enables sellers to coordinate pricing.

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Product differentiation in monopolistically competitive markets

must reflect real differences in the product, not perceptions. cannot simply be due to a different type of packaging. is hard to identify in practice.

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Product differentiation can be achieved through

friendly service. advertising designed to make consumers think a firm’s product is superior to its competi-tors’ product. a really cool package.

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A Cournot duopoly equilibrium occurs at the intersection of the two reaction functions be-cause

each firm is maximizing its profit given the output level of the other firm.

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A Stackelberg leader

earns more profit than its follower.

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During the time of the Soviet Union, caviar prices remained high because

the strong central government closely monitored caviar production, limiting poaching and illegal production.

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In Cournot’s duopoly model, two firms decide their profit-maximizing level of output

based on the other firm’s expected level of output, which is assumed to remain un-changed.

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The relationship between one firm’s profit-maximizing level of output as a function of the output of a rival firm in a duopoly market is referred to as the

reaction curve.

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In which order are the different models ranked, from most to least, in terms of the markup of price over marginal cost of a profit-maximizing firm in the long run?

monopoly, Cournot, Stackelberg, perfect competition

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Which of the following is not true of a monopolistically competitive firm in long-run equili-brium?

P = LMC

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Which of the following is true of a firm operating in a perfectly competitive market but not true for a monopolist?

entry barriers are low

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Which of the following is not a reason a cartel agreement is likely to fail?

cartel agreements usually fail to produce economic profits for member firms

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Which of the following is the best example of a cartel?

auto assembly workers at Ford, GM, and Chrysler represented by the United Auto Work-ers union

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Which of the following is a reason why government intervention into monopolistically com-petitive markets is not warranted?

differentiated products are valued more than the social losses from monopoly power

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Which of the following is the best example of an oligopoly market?

cigarette producers

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The law of diminishing marginal returns, when applied to labor, says that

each additional worker contributes a smaller increase to total output.

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The marginal value product of labor equals

marginal product of labor times price of the output per unit.

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The marginal value product of labor measures

the extra revenue a competitive firm receives by selling the additional output made by an additional worker.

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Assume quantity of labor is on the horizontal axis. The marginal value product of labor curve differs from the marginal product of labor curve

by only the units on the vertical axis since the two curves coincide.

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The marginal value product of labor curve

is the firm’s demand curve for labor, holding all other inputs constant.

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The marginal value product of labor curve for a competitive firm is downward-sloping be-cause

marginal product of labor is diminishing.

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Which of the following is the competitive firm’s profit-maximizing condition for hiring labor?

w = MVPL

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w/MPL can be interpreted as

the marginal cost of producing one more unit of output by using an additional unit of labor

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The marginal product of labor shows

the extra output made by the last worker hired.

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Diminishing marginal returns to labor occur because

additional workers have less and less capital with which to produce output.

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An expansion pathis the locus of

is the locus of cost-minimizing points for a given set of input prices.

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For a competitive industry, the market input demand curve for labor is

less elastic than the sum of the individual firm demand curves.

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As compared to the horizontal sum of individual firms’ labor demand curves, the market demand curve for labor is

less elastic than the horizontal sum.

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An industry’s input demand curve is referred to as a “derived demand” because

the demand for the input ultimately derives from consumers’ demand for the final product produced by that input.

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Which of the following is not true of the industry demand curve for labor under competi-tion?

The industry demand is found by summing each firm’s marginal value product.

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Which of the following conditions would not be associated with a more elastic input de-mand curve?

supply curve of other inputs is less elastic

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Which of the following will lead to a less elastic short-run industry labor demand?

a product or output demand that becomes less elastic

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Assume an outward shift in the demand for corn. Which of the following best describes the short-run response within the competitive corn market?

Existing firms will expand output using more of the variable input, but the same amount of fixed inputs.

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The supply curve of labor to all industries taken together is very inelastic, almost vertical. Does this imply that the supply curve of labor to a particular industry is very inelastic?

No, because the stock of labor to the economy is relatively fixed but labor can move easily from one industry to another.

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Under which of the following circumstances will the long-run industry demand for labor be most elastic?

an elastic supply of other inputs and an elastic product demand

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Which of the following supply curves of an input is likely to be the most elastic?

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The supply curve of labor to a competitive firm is

horizontal because the firm can hire as many workers as it wants at the market wage.

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The demand for electricians increases in the aerospace industry. The increased quantity supplied of electricians to the aerospace industry comes from

the other two industries. electricians entering the market because of higher wages.

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For an individual competitive firm, the supply curve for an input is

horizontal

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The supply curve of an input to the entire economy is generally thought to be

less elastic than the supply curve faced by an individual firm.

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Which of the following statements is true regarding competitive equilibrium for the labor market?

Marginal value product equals the wage rate for the firm. Workers are paid their marginal value product. Each firm pays exactly the same wage.

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If an input is hired by firms in several industries, then its price

is the same in each industry.

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If labor is hired in two industries, A and B, and the demand for labor falls in industry B, then

the wage rate will fall in both industries, employment will fall in B and increase in A.

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Which of the following best describea the expected outcome if the demand for programmers by industry X increases, holding constant the de-mand for programmers by industry Y and the total supply of programmers?

Wages rise in both industries while employment increases in X and decreases in Y.

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Which of the following is true of the labor supply curve confronting a particular industry when the industry is one of many buyers of the input?

The smaller the share of the total market employed by an industry, the more elastic is the input supply curve.

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For a monopolist,

the wage paid to labor will be less than the marginal value product of labor.

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The demand curve for labor for a monopolist when other inputs are fixed is equal to its

marginal revenue product curve.

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Because a monopoly hires workers up to the point where their marginal revenue product equals the wage rate, the monopoly will

pay less than marginal value product of labor.

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The monopolist’s demand curve for an input, where other inputs are held fixed in quantity,

equals the marginal revenue product curve for the input.

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Under monopoly,

fewer workers are employed than would be under competition.

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When the input supply curve confronting an individual firm is upward sloping, we can con-clude that

the firm is a monopsony.

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For a monopsony buyer of labor, the marginal cost of hiring one more worker is

greater than the wage.

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Which of the following is not true for a monopsonist in equilibrium?

The wage paid will equal the marginal value product.

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In comparing a monopsony labor market with competitive labor market conditions, which of the following is true?

Employment and the wage are both lower under monopsony.

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A minimum wage imposed on a monopsonist in the labor market

may lower the firm’s marginal factor cost and increase employment.

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A monopsony is

the sole buyer of some type of input.

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The marginal revenue product curve of a monopolist differs from the marginal value prod-uct curve in that

marginal revenue for monopoly is less than price.

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For a firm that is a perfect competitor in the output market but a monopsonist in the input market for labor,

the wage rate will be less than the marginal cost of labor.

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Other things equal, a monopolist hires fewer workers than would be hired if the industry were perfectly competitive because

the monopolist equates the wage rate with its marginal revenue product rather than its marginal value product.

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the monopolist equates the wage rate with its marginal revenue product rather than its marginal value product.

a monopsony is large relative to the input market while a monopoly is large relative to the product market.

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The demand curve for labor when all inputs are variable

is downward-sloping since both the substitution effect and the output effect imply greater employment at a lower price.

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Information obtained from a firm’s short-run demand curve for labor shows that a ten-percent reduction in the wage rate will lead to a twelve-percent increase in employment for the firm. The change in employment for the industry will be

less than twelve percent.

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Which of the following would not cause the demand curve for an input to shift?

a change in the price of the input

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Which of the following does not influence the price elasticity of demand for an input?

the price of the input

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Assume that a firm has a fixed coefficients production function with isoquants that are L-shaped, with labor on the horizontal axis. In this case, a decrease in the price of labor will

induce the firm to expand its output level, moving along an unchanged long-run expan-sion path.

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The input demand curve is more elastic

the more elastic the supply curves of other inputs.

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Assume that the marginal product of labor is 2 units and that the wage rate is $10, the firm will hire an extra unit of labor as long as the product price is greater than

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Which of the following will lead to an outward shift of the firm’s demand for labor?

an increase in the amount of the fixed factor (capital) used by the firm.

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For a profit-maximizing firm that is a price taker in the output market and a wage taker in the labor market, which of the following will be true?

The marginal cost of the last unit of output will equal the price of output. The value of the marginal product of labor will equal the wage rate for the last unit of labor hired.

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The substitution effect of an increase in the wage rate (with labor on the x-axis) is seen by

a movement upward along an isoquant.

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The output effect of an increase in the wage rate (with labor on the x-axis) is seen by

a movement downward along an expansion path.

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The input demand curve is more elastic

the more elastic the product demand.

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The input demand curve for a monopolist slopes downward because

marginal revenue falls as more output is sold. marginal productivity of inputs falls as more input is employed.

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Other things equal, a monopsonist pays a wage rate that is_______ than would be paid by a monopolist.

lower

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The term “derived demand curve” means

that demand curve of an industry is derived from the demand curve for the product la-bor produces.

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Other things equal, the marginal value product curve (MVP) is more elastic than the mar-ginal revenue product curve (MRP) because

as output of the good labor produces increases, the price of the good decreases.

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When the supply of labor used to produce a good sold in a competitive market increases, causing the wage of labor to produce that good to fall, for output to remain unchanged

the labor demand curve must shift in and to the left.

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What happens to the labor demand curve for tomato pickers if workers become stronger and smarter?

It shifts to the right.

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The monopsonist’s marginal input cost is greater than its average input cost because

in order to hire an additional worker the firm must increase the wages of all workers.

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Which of the following is not a factor in determining the elasticity of demand for labor em-ployed as bank tellers in a competitive industry?

an increase in the demand for banking services

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A competitive industry’s labor demand curve is more inelastic than the labor demand curve for any individual firm within that industry because

as wages fall, causing the quantity demanded of labor to rise, the price of the output labor produces falls.

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The average player in the National Basketball Association (NBA) earns about $4 million per year while the average player in the Women’s National Basketball Association (WNBA) earns just $60,000. This is evidence that

the marginal value product of one more NBA player is greater than the marginal value product of one more WNBA player.

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faculty member at a Division I college in this country earns about $94,000 while football coaches earn on average $1 million is proof that we value sports in this country more than we value education.” This statement is essentially

false because the marginal value of one more faculty member is low relative to the marginal value of one more football coach.

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Mines located in rural mountain towns in Kentucky and West Virginia are in many in-stances the only employer in the area. In this case the mining company would be

a monopsonist.

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The difference between marginal value product and marginal revenue product is that

that the marginal revenue product decreases as additional labor is hired because the ad-ditional output causes the market price of the good to decrease, while for marginal val-ue product the product price remains constant.

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When all inputs are variable, a competitive firm’s labor demand curve is

more elastic relative to when only one input is variable.

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The marginal revenue curve of a monopolist lies below the demand curve because

the monopolist must lower price on all units sold in order to sell additional units.

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A monopolist

can choose any price along the market demand curve.

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A monopoly’s demand curve is

the same as its average revenue curve.

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The demand curve for a monopolist slopes downward because

it faces the market demand curve.

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The monopolist’s demand curve slopes downward because

the monopolist faces the market demand curve which is the horizontal summation of all individual consumer demands.

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The market demand curve and the demand curve faced by a monopoly are

identical

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The marginal revenue curve of a monopolist is

always downward-sloping.

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If the monopolist is operating in the elastic portion of its demand curve, then

an increase in price will decrease total revenues.

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A monopoly will never operate in the inelastic segment of its demand curve because

it would imply a marginal cost greater than marginal revenue.

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A monopoly will maximize profits by producing the level of output where

it maximizes the difference between total cost and total revenue.

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If marginal costs are zero, a monopoly will maximize profits by

maximizing total revenue.

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The price markup of a monopolist is

(P – MC)/P.

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To maximize profits, the price markup should

equal the inverse of demand elasticity.

🗑

In comparing a monopoly and a competitive firm in the long run, which of the following statements is incorrect?

A monopoly will always earn economic profit but a competitive firm will not.

🗑

When a monopoly is maximizing profits, which of the following conditions generally holds?

MC = MR < AR

🗑

If the demand elasticity for the monopolist’s product is equal to 2 and marginal revenue is 10, what is the price?

$20

🗑

A profit-maximizing monopolist will earn economic profits if it is able to produce at a level of output where

average revenue is greater than average cost.

🗑

Which of the following statements is true?

The monopolist’s demand curve slopes down and is also the average revenue curve, and the marginal revenue curve lies below the demand curve.

🗑

In response to an increase in demand, a monopoly will typically

increase price.

🗑

Which of the following relationships between marginal revenue and price elasticity of demand is incorrect?

When demand is unit elastic, price approaches marginal revenue.

🗑

A per-unit tax imposed on a monopolist will lead to

an increase in deadweight efficiency loss.

🗑

If a monopolist's marginal cost is zero, the profit-maximizing monopolist will

set a price where demand is unit-elastic.

🗑

A profit-maximizing monopolist will maximize both total revenue and economic profit at the same price when

marginal cost is zero.

🗑

Marginal revenue is negative when

demand is inelastic.

🗑

Which of the following is not necessarily true at the profit-maximizing quantity for a monopolist?

The slope of the marginal revenue curve equals the slope of the marginal cost curve.

🗑

Assume that a firm’s price is $4, marginal cost is $3, and the price elasticity of demand is 4. Based on this information, we can conclude that the firm

is maximizing profit.

🗑

Which of the following statements is true regarding a monopolist?

An excess-profits tax will have no impact on the monopolist’s level of output.

🗑

Which of the following statements about the effects of monopoly is incorrect?

A monopoly causes input prices to rise.

🗑

When the government regulates the price of a monopolist and sets the price below the profit-maximizing price,

the monopolist’s demand and marginal revenue curves become horizontal at the regulated price so the firm has no incentive to restrict output over the horizontal range.

🗑

Total revenue falls by $5 when a monopolist sells an additional unit. Therefore,

the monopolist is not maximizing profits.

🗑

At an output rate of 1,000, a monopolist’s average revenue is $40, its marginal revenue is $30, its marginal cost is $30, its average variable cost is $35, and its fixed costs are $5,000. The monopolist is

maximizing profits and profits are zero.

🗑

Which of the following statements about a monopoly in long-run equilibrium is incorrect?

A monopoly will never sell where the price elasticity of demand is elastic.

🗑

Although a monopoly can charge any price it likes along its demand curve, it doesn’t charge the highest price possible because

it would be inconsistent with profit maximization goals.

🗑

The relationship between price, marginal revenue, and price elasticity of demand is

P = MR/[1 –(1/η)].

🗑

A monopolist is considered to have no supply curve because

optimal output and price depend on both marginal cost and demand.

🗑

A monopolist always operates on the elastic portion of its demand curve because

it operates where marginal revenue equals marginal cost, and if marginal cost is positive then demand is elastic.

🗑

Generally, we expect monopolies to_______ output when demand for their product rises.

increase

🗑

Monopoly power does not guarantee profits because

monopolies cannot force consumers to buy their product.

🗑

All of the following are sources of monopoly power except

high prices.

🗑

A natural monopoly

is an industry in which production cost is minimized if one firm supplies the entire output.

🗑

The Lerner index

measures monopoly power as the markup of price over marginal cost.

🗑

Monopoly power possessed by any one firm is

greater, the greater the number of firms. greater as the elasticity of supply by rival firms as a group increases. less as the elasticity of demand of other firms as a group decreases.

🗑

Monopoly power possessed by any one firm is

less as the elasticity of supply by rival firms as a group increases.

🗑

Which would not be a barrier to entry?

a very high Lerner index

🗑

Compared to a competitive industry, other things equal, a monopoly

restricts output and charges a higher price.

🗑

An important difference between monopoly and a competitive industry is that

the monopoly does not have a supply curve.

🗑

The deadweight loss of monopoly refers to

the loss of consumer and producer surplus from monopoly pricing.

🗑

The welfare cost of monopoly is due to

the production of too low a level of output.

🗑

Other things equal, a monopoly charges a higher price and produces a smaller rate of output than is true under perfect competition. Therefore, there is a loss of consumer surplus

which is greater than the increase in profits to the monopolist.

🗑

Which of the following best describes the effect of a monopolist’s reducing its output below the competitive level?

a transfer of consumer surplus to the monopolist as producer surplus and a deadweight loss of consumer and producer surplus from the reduced output

🗑

Comparing monopoly to perfect competition, which of the following is true concerning consumer surplus (CS), producer surplus (PS) and total surplus (TS = CS + PS)?

Consumer surplus is less in monopoly, but producer surplus is greater. Total surplus is less in monopoly.

🗑

Dynamic analysis suggests that certain monopolies should be viewed more favorably because

their monopoly power may be a result of creating a very useful product.

🗑

A price ceiling applied to a monopoly can

generate an increase in output. induce the monopoly to produce the efficient rate of output. generate the perfectly competitive price-output combination.

🗑

Which of the following is not likely to result from the imposition of a price ceiling upon a monopolist?

increase in product quality as compared to pre-regulation quality

🗑

Granting a subsidy per unit of output to a monopolist will have which of the following results?

a reduction in the effective marginal cost and an increase in output

🗑

Antitrust laws are

designed to promote a competitive market environment.

🗑

If MC is constant, in order to graphically identify a monopolist’s profit, which curves are needed?

MR, MC, and D

🗑

The markup of price over cost, (P – MC)/P, for a monopolist is

inversely related to elasticity of demand.

🗑

Why do gas stations near airports often charge more for gasoline?

They face a smaller elasticity of demand.

🗑

A monopoly’s demand curve is______ where_______ is positive.

elastic; marginal revenue

🗑

The deadweight loss due to monopoly restriction of output occurs over units of output

for which the MB would be greater than MC but don’t get produced.

🗑

Monopoly power refers to

a firm’s ability to set price above marginal cost.

🗑

If the marginal cost of producing a baseball bat is $30, and the elasticity of demand for Acme Baseball Bat Company is 4, at what price should Acme set its price if it wants to maximize profits?

$40

🗑

Suppose your pharmaceutical company has a drug that has an estimated price elasticity of demand of 1.2. If the marginal cost of producing each pill is $3, at what price should you sell your drug if profit maximization is your objective?

$18

🗑

Magic Cigarette Company produces packs of cigarettes at a marginal cost of $2 per pack. If they currently sell their product at $5 per pack, what is their Lerner Index of monopoly power?

0.6

🗑

When the Lerner index is zero,

demand is infinitely elastic.

🗑

As the Lerner index approaches zero,the firm’s

the firm’s price is closer to marginal cost.

🗑

As the Lerner index approaches one,

the firm has increasing monopoly power.

🗑

Which of the following is the consequence of a firm with monopoly power?

price is greater than marginal cost output is less relative to a more competitive market there is a deadweight loss

🗑

Antitrust cases filed by the United States Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice increased significantly beginning in the late 1930’s and then subsided beginning in the early 1980’s.

The static view of monopoly prevailed more in the 1930’s, and the dynamic view prevailed more beginning in the 1980’s.

🗑

Which of the following is an argument supporting the inefficiency of monopoly power?

The firm sells less than what is socially optimal.

🗑

Which of the following does not constitute a barrier to entry into a market?

homogenous product

🗑

If a firm’s market share is 0.2, and market demand’s price elasticity is 1.5, the firm’s price elasticity of demand is

7.50

🗑

If the firm’s market share increases, its price elasticity of demand

decreases

🗑

If the price elasticity of market demand increases, the price elasticity of demand for a firm in the same market will

increase

🗑

As a measure of market power, the four-firm concentration ratio has the following drawback(s).

All of the above are drawbacks of the four-firm concentration ratio.

🗑

The Herfindahl-Hirshman Index (H) is given by the formula

2iHs=Σ.

🗑

The market-share-weighted Lerner Index is

directly related to the Herfindahl-Hirshman Index.

🗑

Each firm in the industry has the same market share of 0.2. What is the H index for this industry?

0.2

🗑

If the firms merge, what then would be the H index if the other firms’ market shares are equal after the merger?

0.32

🗑

Is the U.S. Department of Justice likely to challenge the merger?

Yes

🗑

The famous antitrust case against DuPont’s new product, cellophane, hinged on

cellophane’s cross price elasticity again other flexible wrapping materials.

🗑

One reason for allowing a natural monopoly to operate is that

a competitive organization of the industry would not be sustainable.

🗑

One reason for allowing a natural monopoly to operate is that

cost of production would be lower for a natural monopoly than if more than one firm were in the industry facing the same market demand.

🗑

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