ECONOMICS 53 Problem Set 6 Due before lecture on April 1

Size: px

Start display at page:

Download "ECONOMICS 53 Problem Set 6 Due before lecture on April 1"

Garry Elliott
7 years ago
Views:

1 Department of Economics Spring Semester 2010 University of Pacific ECONOMICS 53 Problem Set 6 Due before lecture on April 1 Part 1: Multiple Choice (15 Questions, 1 Point Each) 1. If a monopolist's marginal revenue is $35 a unit and its marginal cost is $25, then A) to maximize profit the firm should decrease output. B) to maximize profit the firm should continue to produce the output it is producing. C) to maximize profit the firm should increase output. D) Not enough information is given to say what the firm should do to maximize profit. Figure 1 2. Refer to Figure 1. If the firm's average total cost curve is ATC1, the firm will A) make a profit. B) suffer a loss. C) shut down D) break even. 3. Refer to Figure 1. If the firm's average total cost curve is ATC2, the firm will A) make a profit. B) suffer a loss. C) shut down D) break even.

2 4. 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 elastic. D) the other competing firms must sell fewer units. 5. For a monopolist, price A) equals marginal revenue at all output levels. B) is less than marginal revenue. C) is greater than marginal revenue. D) can be greater than or less than marginal revenue. 6. In the long run, a monopoly A) will always earn zero economic profits. B) may earn positive economic profits due to entry barriers. C) will never exit the industry. D) will yield an efficient outcome. 7. The Exclusive Gift Company has a monopoly over the sale of gold hula hoops. This company is currently pricing and producing where marginal revenue is equal to marginal cost. It is selling 50 gold hula hoops at a price of $5,000 each. Total costs for the company are $300,000 of which fixed costs are $100,000. You are hired as an economic consultant to this company. You should advise this monopolist to A) shut down in the short run and exit the industry in the long run. B) produce in the short run and expand capacity in the long run. C) produce in the short run but exit the industry in the long run if conditions do not change. D) shut down in the short run but expand capacity in the long run if conditions do not change. 8. Relative to a monopolized industry, a perfectly competitive industry is more likely to produce A) more output, charges higher prices, and earns economic profits. B) more output, charges lower prices, and earns economic profits. C) more output, charges lower prices, and earns zero economic profit. D) less output, charges higher prices, and earns zero economic profits. 9. are NOT a barrier to entry. A) Government franchises B) Patents C) Consent decrees D) Economies of scale 10. An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient is called a(n) monopoly. A) fixed cost C) patent B) economies of scale D) natural

3 Figure Refer to Figure 2. The amount of consumer surplus under monopoly is equal to area A) AFE. B) GAB. C) BEC. D) AFC. 12. Refer to Figure 2. From society's point of view the efficient level of electricity production is megawatts. A) 500 B) 600 C) 800 D) Refer to Figure 2. If Ohio Edison is regulated to act as a perfectly competitive firm (instead of the monopoly level) A) output would increase from 500 to 600 units. B) consumer surplus would increase by the area FGBC. C) the firm will earn profits of BEC. D) the net social gain to society equals ACF. 14. Refer to Figure Ohio Edison would be willing to pay up to area for rent -seeking activities to protect its monopoly power. A) FAE. B) FGBE. C) FGBC. D) BEC. 15. A monopolist who has a horizontal ATC and MC curves and perfectly price discriminates A) leaves buyers a decreased but still positive amount of consumer surplus. B) increases the amount of deadweight loss C) appropriates all consumer surplus as profit. D) does not change the amount of consumer surplus that buyers had before the monopolist perfectly price discriminated.

4 Part II: Short Answers (70Points) Question 1: Definition of Monopoly (6 Points) A successful local entrepreneur opens up the only Chevrolet dealership in Laredo, TX. Is this Chevrolet dealership a monopoly? Explain your answer. Question 2: Decision Outcomes for a Monopolist (Graphical Analysis) (12 Points) (3 Points each) NoSmak Inc. is the only seller of an anti-kissing mouthwash. Figure 1 below shows the demand curve, marginal revenue curve and cost curves facing NoSmak Inc. Figure 1 (a) What is the profit-maximizing level of output for NoSmak Inc.? (b) How much will NoSmak charge for its product? (c) What is the total cost associated with the level of production in Part (a)? (d) Given your answers above, calculate the profit or loss for NoSmak.

5 Question 3: Decision Outcomes for a Monopolist (Table Analysis) (14 Points) Table 1 Price per unit Quantity Demanded (Units) Total Cost of Production (Dollars) $85 10 $ Rosetta Stone is a monopolist in the foreign language software industry. Its demand and cost structure is given in Table 1 above. (a) What is the marginal revenue from the sale of the 12 th unit? (2 Points) (b) Calculate Rosetta Stone s profit maximizing output level. At that output level, what price will it charge? (6 Points) (c) Calculate Rosetta Stone s profit (2 Points) (d) What would you expect to happen to Rosetta Stone s profit in the long-run? (4 Points) Question 4: Decision Outcomes for a Monopolist (Quantitative Analysis) (10 Points) The government of Catalina Island is currently inviting investors to bid for the exclusive right to provide cable television service to its residents. The market demand for this service is P= Q, where Q is the number of households that would subscribe to the cable service and P is the monthly fee charged to the subscribers. The associated marginal revenue curve is MR= Q. Universal Entertainment is interested in bidding for the right to provide cable service on Catalina Island. It has a constant average total cost and marginal cost of $15 for providing cable service to each household. (a) If Universal Entertainment were to be awarded the exclusive right to provide cable service on Catalina Island, how many households would it service? What will be the monthly fee that Universal will charge its customers? (b) Calculate the profit that Universal Entertainment will earn

6 Question 5: Social Costs of Monopoly (16 Points) Suppose a firm has a patent on a special process to make a unique smoked salmon. The following equations provides information about the demand, marginal revenue and costs that is facing this monopolist. P = -2Q + 20 (demand function) MR = -4Q + 20 (marginal revenue function) MC = ATC = $6 (fixed marginal cost and fixed average total costs) Figure 1 plots the demand, marginal revenue and ATC and MC curves. Figure Price, MR MC=ATC MR D Quantity Produced (Q) (a) On the graph above label the quantity and price chosen by the monopolist as (qm) and (pm) respectively. Solve for these points algebraically. (2 Points) (b) Given your answer in part (a), calculate the profit earned by the monopolist. Show this profit on the graph above. (1 Point) (c) Calculate the consumer surplus that exists in this monopoly situation. Show this area on the graph above. (2 Points) (d) What is the maximum amount this monopolist would be willing to pay for rent-seeking behavior? (2 Points) (e) Calculate the total surplus that exists in this monopoly situation. (1 Point)

7 (f) Find the efficient outcome that would exist under perfect competition. Label the quantity and price chosen by a perfectly competitive firm as (qc) and (pc) respectively. Is the monopolist price higher or lower than the efficient outcome? Is the monopolist quantity higher or lower than the efficient outcome? (2 Points) (g) Is there a deadweight loss (loss to society) if the monopolist charges the monopoly price? If it does exist, calculate the amount of this deadweight loss. (2 Points) (h) If the monopolist is able to perfectly price discriminate, is the outcome efficient? Explain. What has happened to consumer surplus, producer surplus and total surplus compared to the non-price discriminating situation? (4 Points)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that