Principle of Microeconomics Econ chapter 13

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1 Principle of Microeconomics Econ chapter 13 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot wave, which tests the skills of even the most talented surf and wake board riders on the planet. WaveHouse is the only place in San Diego where this service is offered. To maximize profits, WaveHouse would produce a quantity where: A) Marginal revenue is less than marginal cost B) Price is maximized C) Marginal revenue is equal to marginal cost D) Marginal revenue is greater than marginal cost 1) 2) The figure above shows the demand curve (D) faced by Visual, Inc., a cable TV company, and the firm's marginal revenue (MR), marginal cost (MC), and average cost (LRAC) curves. If Visual is regulated according to an average cost pricing rule, it will serve million households and set a price of per household per month. A) 4; $12 B) 1; $48 C) 3; $24 D) 2; $36 2) 1

2 3) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's marginal revenue equals its marginal cost when it produces A) 20 units of output. B) 5 units of output. C) 0 units of output. D) 15 units of output. 3) 4) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sues demand and marginal revenue curves are illustrated in the figure above. Sue's Surfboards currently rents 15 surfboards an hour. Sue's total revenue from the 15 surfboards is A) $150. B) $225. C) $10. D) $300. 4) 2

3 5) The Public Service Company of Colorado is a natural monopoly in the transmission and distribution of electric power. As such, it will incur an economic loss if it A) goes out of business. B) prices its services at marginal cost. C) prices its services at average total cost. D) all of the above 5) 6) Prime Pharmaceuticals has developed a new asthma medicine, for which is has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals operates as a single-price monopoly, then consumer surplus is and producer surplus is. A) zero; $64 million B) $32 million; $32 million C) $16 million; $48 million. D) $16 million; $32 million 7) Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals could perfectly price discriminate, then which of the following is true? A) It would produce and sell 16 million inhalers. B) Inhalers would sell for $2 each. C) Inhalers would sell for $5 each. D) None of the above answers is correct. 8) To its maximize profit, the monopolist produces on the portion of its demand where. A) elastic; P = MC B) elastic; MR = MC C) inelastic; MR = MC D) inelastic; P = MC 6) 7) 8) 3

4 9) In the figure above, a single-price unregulated monopoly will produce an amount of output equal to A) k. B) h. C) j. D) none of the above 9) 10) For a single-price monopolist, as output increases, total revenue 10) A) decreases continually. B) initially increases and then decreases. C) increases continually. D) initially decreases and then increases. 11) If the firm in the figure above is unregulated, the deadweight loss will be 11) A) $400. B) $200. C) zero. D) $100. 4

5 12) Methods of rent seeking includes which of the following? I. Buying a monopoly II. Creating a monopoly III. Price discrimination A) III only B) II and III C) I and II D) I and III 12) 13) Which area in the above figure shows the producer surplus at the price and quantity that would be set by a single-price monopoly? A) C + D + E B) C + D + F + G + I C) C + D + F + G D) C + D 14) Compared to a single-price monopoly, the output of a perfectly competitive industry with the same costs A) could be more than, less than, or equal to the monopoly's output. B) is the same as the monopoly's output. C) is less than the monopoly's output. D) is more than the monopoly's output. 13) 14) 5

6 15) Which area in the above figure shows the consumer surplus at the price and quantity that would be set by a single-price monopoly? A) C + D + E + F + G + H B) A + B C) C + D D) A + B + C + D + E 15) 16) The following are key features of a monopoly EXCEPT 16) A) the monopoly is protected by a barrier to entry. B) no close substitutes exist for the good or service. C) the monopoly has severe diseconomies of scale. D) the monopoly has a strong influence over the price of the good or service. 17) Which of the following is NOT necessary for a monopoly to increase its economic profit by discriminating among groups of buyers? A) The firm must be able to separate different buyer types. B) Resale of the product is difficult or unlikely. C) The firm must be able to identify each individual consumer's precise willingness to pay. D) Each group of buyers must have a different willingness to pay. 17) 18) Which of the following markets will have the largest deadweight loss? 18) A) A market that consists of a single-price monopoly. B) A market that consists of a perfect price discriminating monopoly. C) A market that consists of perfectly competitive firms. D) None of the above. There is no deadweight loss as long as firms produce at the level of output where marginal revenue equals marginal cost. 6

7 19) The figure above shows the cost, demand, and marginal revenue curves for a monopoly. The firm 19) A) will produce 20 units per day. B) is a natural monopoly. C) will earn an economic profit of $20. D) will charge a price of $10 per unit. 20) Total revenue equals 20) A) the area between the demand curve and the marginal revenue curve. B) total cost minus profit. C) price multiplied by quantity sold. D) marginal revenue multiplied by quantity sold. 7

8 21) Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if Prime Pharmaceuticals operates as a single-price monopoly, then there will be a deadweight loss equal to A) $32 million. B) zero. C) $16 million. D) $24 million. 22) Which of the following statements regarding a marginal-cost pricing rule for a natural monopoly is WRONG? A) It maximizes total surplus in a regulated industry. B) It allows the firm to earn a normal profit. C) It is efficient. D) It sets price equal to marginal cost. 21) 22) 23) Which of the following statements is true? 23) A) Perfect price discriminating monopolists can eliminate all deadweight losses and achieve efficiency. B) Perfectly competitive markets are efficient, but monopoly markets never are efficient. C) Perfectly competitive markets always reach equilibrium but monopoly markets never reach equilibrium. D) All the above statements are true. 8

9 24) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then the lowest ticket price would be A) $2.00. B) $1.00. C) $3.50. D) $ ) 25) In the figure above, the curve labeled "X" can be a 25) A) monopoly's marginal revenue curve. B) monopoly's demand curve. C) perfectly competitive firm's marginal revenue curve. D) perfectly competitive firm's demand curve. 9

10 26) In the figure above, the total revenue of a perfectly price-discriminating monopolist at the profit-maximizing output is equal to the area of A) obeij. B) 0aij. C) aci. D) 0dgh. 26) 27) Which area in the above figure equals the consumer surplus under perfect price discrimination? 27) A) A + B + C + D + E B) A + B C) A + B + C + D + E + F + G + H D) There is no consumer surplus. 10

11 28) For the monopoly shown in the figure above, the profit maximizing price is per unit. 28) A) $30 B) $10 C) $20 D) $50 29) For the unregulated, single-price monopoly shown in the figure above, when its profit is maximized, output will be A) 4 units per year and the price will be $4. B) 6 units per year and the price will be $4. C) 4 units per year and the price will be $6. D) None of the above answers is correct. 30) Compared to the perfectly competitive equilibrium, a single-price monopolist in the same market would charge a price and sell a quantity. A) higher; greater B) lower; lesser C) lower; greater D) higher; lesser 29) 30) 11

12 31) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sue's demand and marginal revenue curves are illustrated in the figure above. The change in the total revenue from renting the 15th surfboard is A) $0. B) $20. C) $10. D) $15. 31) Demand Schedule Facing a Perfectly Price Discriminating Firm Price (dollars) Quantity Sold ) Using the demand schedule in the above table, if the firm's marginal cost is constant at $3.00, output for a perfectly price discriminating monopolist is A) 4 units. B) 3 units. C) 5 units. D) 2 units. 32) 12

13 33) In the above figure, if the natural monopoly is regulated with an average cost pricing rule and the firm does not inflate its costs, the deadweight loss to society is A) efc. B) zero. C) gac. D) ebc. 33) 34) An example of a monopoly would be 34) A) AT&T long distance phone service. B) the local water company. C) one of many U.S. wheat farmers. D) one of the few U.S. auto makers. 35) Which of the following four cases might a monopoly NOT arise? 35) A) Mark sells his tomatoes at the local farmers market B) Anton Goldlover Inc. buys all of the gold mines in the world C) Apple cuts the price of ipods below the competition to increase market share D) The local government issues a cable company exclusive rights to provide cable services to the town 36) is defined as any attempt to capture consumer surplus, producer surplus or economic profit. A) Search B) Maximizing monopoly profits C) Rent seeking D) Price discrimination 36) 13

14 37) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then it would sell A) 30 tickets. B) 100 tickets. C) 50 tickets. D) 60 tickets. 37) 38) An example of a monopoly is 38) A) a big city restaurant. B) the only veterinarian in an isolated farm community. C) a large hospital in a big city. D) the stock market. 14

15 39) In the figure above, what is the loss of consumer surplus if the firm is a perfectly price-discriminating monopoly instead of a perfectly competitive industry? A) $90.00 B) $45.00 C) $0 D) $ ) 40) In the above figure, if the natural monopoly is regulated with an average cost pricing rule and the firm does not inflate its costs, then the firm will produce A) 12 million units, charge $18 per unit and earn a normal profit. B) 8 million units, charge $21 per unit and earn a normal profit. C) nothing unless the government provides subsidies to cover its losses. D) 16 million units, charge $16 per unit and earn a normal profit. 40) 15

16 41) The unregulated, single-price monopoly shown in the figure above will sell 41) A) 100 tickets. B) less than 30 tickets. C) 50 tickets. D) 30 tickets. 42) Which of the following is a characteristic of a single-price monopoly? 42) A) The firm is a price taker. B) There are many close substitutes for the firm's product. C) Price exceeds marginal revenue. D) Demand is perfectly elastic. 43) If a natural monopoly is broken up into many smaller firms then 43) A) efficiency will increase. B) the price will decrease. C) the average total costs of production will increase. D) None of the above because it is illegal to break up a natural monopoly into smaller firms. 44) In rate of return regulation, the 44) A) regulatory rule is equivalent to average cost pricing. B) rate of return is set in accordance with what is normal in competitive industries. C) target rate of return is included in the firm's average total cost. D) All of the above answers are correct. 16

17 45) The figure above shows a monopoly firm's demand curve. If the price and quantity of haircuts move from point t to point u, the monopoly's A) marginal revenue will increase. B) total revenue will fall. C) total revenue will rise. D) total revenue will remain the same. 46) Michael Jackson owns the copyrights to many of the Beatles songs. What are the barriers to entry, if any, that protect this firm from competition? A) Michael Jackson s ownership is a natural monopoly. B) Michael Jackson has a legal barrier to entry which creates a legal monopoly. C) Michael Jackson s ownership is a public franchise. D) Michael Jackson s ownership is a government license. 45) 46) 17

18 47) If an average cost pricing rule is imposed on the firm in the figure above, the consumer surplus will be A) $450. B) zero. C) $400. D) $ ) 48) Prime Pharmaceuticals has developed a new asthma medicine, for it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if it is a single-price monopoly, Prime Pharmaceuticals will produce inhalers and set a price of for each inhaler. A) 8 million; $6 B) 8 million; $2 C) 10 million; $5 D) 16 million; $2 48) 18

19 49) The figure above shows the demand and cost curves for a single-price monopoly. What level of output maximizes the firm's economic profit? A) 20 units B) 30 units C) 50 units D) 0 units 49) 50) Deadweight loss measures the inefficiency as the loss of 50) A) consumer surplus only. B) producer surplus only. C) consumer surplus plus producer surplus. D) consumer surplus minus producer surplus. 19

20 Answer Key Testname: CHAPTER 13 1) C ID: mic9pb ) C ID: mic9pb ) D ID: mic9pb ) A ID: mic9pb ) B ID: mic9pb ) D ID: mic9pb ) B ID: mic9pb ) B ID: mic9pb ) B ID: mic9pb ) B ID: mic9pb ) B ID: mic9pb ) C ID: mic9pb ) C ID: mic9pb ) D ID: mic9pb ) B ID: mic9pb ) C ID: mic9pb ) C ID: mic9pb ) A ID: mic9pb ) A ID: mic9pb ) C ID: mic9pb ) C ID: mic9pb ) B ID: mic9pb ) A ID: mic9pb

21 Answer Key Testname: CHAPTER 13 24) A ID: mic9pb ) B ID: mic9pb ) B ID: mic9pb ) D ID: mic9pb ) A ID: mic9pb ) C ID: mic9pb ) D ID: mic9pb ) A ID: mic9pb ) C ID: mic9pb ) D ID: mic9pb ) B ID: mic9pb ) A ID: mic9pb ) C ID: mic9pb ) D ID: mic9pb ) B ID: mic9pb ) A ID: mic9pb ) A ID: mic9pb ) D ID: mic9pb ) C ID: mic9pb ) C ID: mic9pb ) D ID: mic9pb ) B ID: mic9pb ) B ID: mic9pb

22 Answer Key Testname: CHAPTER 13 47) A ID: mic9pb ) A ID: mic9pb ) A ID: mic9pb ) C ID: mic9pb

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