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Ch13 Review Ques.ons Haşmet Gökırmak
Ch13 Review Ques.ons
Haşmet Gökırmak
1) Do you agree or disagree with each of the following statements? Explain your reasoning. a. For a monopoly, price is equal to marginal revenue because a monopoly has the power to control price. b. Because a monopoly is the only firm in an industry, it can charge virtually any price for its product.
1) (a) Disagree. A monopolist chooses quan.ty so that sets MC = MR, but then charges a price higher than MR. This is because a monopolist faces a downward-‐sloping demand curve. To sell more output, it must lower its price.
(b) Disagree. Demand s.ll constrains monopoly. There are always subs.tutes (however distant) for a monopoly’s output. A rise in price causes a decrease in sales and may or may not decrease total revenue. But there is only one price that will maximize a monopoly’s profits.
2) Explain why the marginal revenue curve facing a compe..ve firm differs from the marginal revenue curve facing a monopolist.
2) A compe..ve firm can sell all the output it wants without having any impact on market price. For each addi.onal unit sold, its revenue will rise by the market price. Hence, MR is the same at all levels of output. Each .me a monopolist increases output by 1 unit, it must lower the price to sell it. The addi.onal revenue the monopolist receives is less than the price because consumers who were already buying the output get a price break too. MR is thus lower than price; and as output increases, both price and MR decline.
3) Assume that the potato chip industry in the Northwest in 2009 was compe..vely structured and in long-‐run compe..ve equilibrium; firms were earning a normal rate of return. In 2010, two smart lawyers quietly bought up all the firms and began opera.ons as a monopoly called “Wonks.” To operate efficiently, Wonks hired a management consul.ng firm, which es.mated long-‐run costs and demand. These results are presented in the following figure.
(ΣiMCi = the horizontal sum of the marginal cost curves of the individual branches/firms.) a. Indicate 2009 output and price on the diagram. b. By assuming that the monopolist is a profit-‐maximizer, indicate on the graph total revenue, total cost, and total profit acer the consolida.on. c. Compare the perfectly compe..ve outcome with the monopoly outcome. d. In 2010, an old buddy from law school files a complaint with the An.trust Division of the Jus.ce Department claiming that Wonks has monopolized the potato chip industry.
(d) The memo should men.on that under the monopoly, the price is higher and output lower than it was under perfect compe..on. Further, the price is higher than marginal cost. This is not efficient because some poten.al customers who are not buying actually place more value on addi.onal units of the good than it would cost to produce them. Breaking up the monopoly into several small firms (its original compe..ve structure) would bring the price and quan.ty back to the efficient level, where P = MC.
5) The following diagram illustrates the demand curve facing a monopoly in an industry with no economies or diseconomies of scale and no fixed costs. In the short and long run MC = ATC. Copy the diagram and indicate the following: a. Op.mal output b. Op.mal price c. Total revenue d. Total cost e. Total monopoly profits f. Total “excess burden” or “welfare costs” of the monopoly (briefly explain)
5) (a) Op.mal output q* (b) Op.mal price p* (c) Total revenue p*Aq*0 (d) Total cost CBq*0 (e) Total monopoly profits p*ABC (f) Total “excess burden” or “welfare costs” of the monopoly ABD The cost to consumers from a higher price is greater than the gain in
profit for the monopolist.
13) The diagram below shows a firm (industry) that earns a normal return to capital if organized compe..vely. Price in the market place is Pc under compe..on. We assume at first that marginal cost is fixed at $50 per unit of output and that there are no economies or diseconomies of scale. [The equa.on of the demand curve facing the industry is P = 100 – 1/180 Q].
Calculate the total revenue to the compe..ve firms, assuming free entry. What is total cost under compe..on? Calculate consumer surplus under compe..on. Now assume that you bought all the firms in this industry, combining them into a single-‐firm monopoly protected from entry by a patent. Calculate the profit-‐maximizing price, Pm, total revenue from the monopoly, total cost, profit, and consumer surplus. Also compare the compe..ve and monopoly outcomes. Calculate the dead weight loss from monopoly. What poten.al remedies are available?
13) Total revenue for the compe..ve firm = $50 x 9,000 = $450,000. Total cost for the compe..ve firm = $50 x 9,000 = $450,000. Profit for the compe..ve firm = TR – TC = $450,000 − $450,000 = $0. Consumer surplus under compe..on = ½($100 – $50) x 9,000 =
$225,000. Deadweight loss under compe..on = $0. Profit maximizing price for the monopoly = $75. Total revenue for the monopoly = $75 x 4,500 = $337,500. Total cost for the monopoly = $50 x 4,500 = $225,000.
Profit for the monopoly = ($75 – $50) x 4,500 = $112,500. (Profit is also calculated as TR – TC = $337, 500 −$225,000 = $112,500)
Consumer surplus under monopoly = ½($100 − $75) x 4,500 = $56,250.
Deadweight loss from monopoly = ½($75 – $50) x (9,000 – 4,500) = $56,250. Remedies might include: break up the monopoly, impose a price ceiling at Pc = $50, get rid of the barriers to entry, impose sanc.ons on those who violate the provisions of the an. trust laws, obtain a consent decree to stop the an.-‐compe..ve behavior.
14) Explain why a monopoly faces no supply curve.
14) A supply curve shows the rela.onship between the price of a product and the quan.ty of the product supplied. In perfect compe..on, the supply curve in the short run is the por.on of the firm’s marginal cost curve that lies above the average variable cost curve. As the price of a good changes, the perfectly compe..ve firm moves up and down its marginal cost curve to determine the output quan.ty to produce. The output quan.ty produced by a monopoly depends on its marginal cost curve and on the marginal revenue associated with a specific price, which is based on the shape of its demand curve, so the amount of output is not independent of the shape of the demand curve as it is in pure compe..on. Therefore, a monopolist does not have a supply curve.
15) Suppose Gloria has the only franchise for a McDonald’s restaurant in Laughlin, Nevada, a city with a popula.on of roughly 8,100. Does the fact that Gloria has the only McDonald’s in town necessarily mean this represents a monopoly? Explain.
15) This does not necessarily cons.tute a monopoly. Even though Gloria has the only McDonald’s in town, this does not mean that there are not any other compe.tors in town, such as Burger King, Wendy’s, or In-‐N-‐Out Burger. Also, consumers may be able to drive to a nearby town to patronize a different McDonald’s restaurant.
Mul$ple Choice Ques$ons
2) A firm must be able to ________ compe..on if it is to exercise control over the price of its product. A) maximize B) increase C) not change D) limit
D) limit
2) Monopolies, oligopolies, and monopolis.c compe..ve industries all A) earn posi.ve profits in the long run. B) have market power. C) are completely unconstrained in their pricing. D) raise price and quan.ty over what would occur in perfect compe..on in order to maximize their profits.
B) have market power.
3) Market power refers to a firm's ability to A) raise price without losing all sales of its product. B) charge any price it likes. C) sell any amount of output it desires at the market-‐determined price. D) monopolize a market completely.
A) raise price without losing all sales of its product.
4) When ________ subs.tutes exist, a firm in an imperfectly compe..ve industry has ________ power to raise price. A) more; more B) more; less C) fewer; less D) no; infinite
B) more; less
5) The demand for food will likely be price ________ while the demand for Brand X Burger will likely be price ________. A) elas.c; elas.c B) elas.c; inelas.c C) inelas.c; elas.c D) inelas.c; inelas.c
C) inelas.c; elas.c
6) For a monopolist to sell more units of output, A) the price must be increased. B) the price must be reduced. C) demand must become more elas.c. D) the other compe.ng firms must sell fewer units.
B) the price must be reduced.
7) For a monopolist, marginal revenue ________ price. A) always equals B) is less than C) is greater than D) is first greater than and then less than
B) is less than
8) The profit-‐maximizing level of output for the Memory Company is __high school yearbooks. A) 0 B) 200 C) 300 D) 350 9) The profit-‐maximizing price for the Memory Company's high school yearbook is A) $0. B) $9. C) $16. D) $20. 10) The maximum profit level for the Memory Company is A) -‐$1,800. B) -‐$1,200. C) -‐$800. D) $0.
8. B) 200 9. C) $16 10. C) -‐$800
11) The barrier to entry protec.ng cable companies is primarily A) network effects. B) economies of scale. C) patents. D) ownership of a scarce factor of produc.on.
B) economies of scale.
12) Patents A) slow the flow of benefits from research and development to consumers. B) are granted for a period of 10 years in the United States. C) create monopolies and are thus efficient. D) All of the above are correct.
A) slow the flow of benefits from research and development to consumers.
13) An industry that realizes such large economies of scale in producing its product that single-‐firm produc.on of that good or service is most efficient is called a(n) ________ monopoly. A) fixed cost B) economies of scale C) patent D) natural
D) natural
14) Which of the following is NOT an example of price discrimina.on? A) airlines charging lower prices to travelers who stay over a Saturday night B) student discounts at movie theaters C) back-‐to-‐school sales D) discounted coffee for senior ci.zens at restaurants
C) back-‐to-‐school sales
15) In perfect compe..on, price is equal to marginal revenue, while in monopoly, price is greater than marginal revenue. A) TRUE B) FALSE
A) TRUE
