Lab 11 1. The following are four differences between monopoly and perfect competition. Which of these is INCORRECT? A) A monopolist has market power while a perfect competitor does not. B) Unlike a perfectly competitive firm, a monopoly can make positive economic profits in the long run. C) A monopoly will charge a higher price and produce a smaller quantity than a competitive market with the same demand and cost structure. D) Monopoly profits can continue to exist in the long run, because the monopoly produces more and charges a higher price than a comparable perfectly competitive industry. 2. Critics of the Canadian Interuniversity Sport (CIS) (formerly the Canadian Interuniversity Athletic Union (CIAU)) argue that the CIS monopolizes college athletics and prevents student-athletes from earning money while in college. If this is true, what type of entry barrier does the CIS have? A) a patent B) a copyright C) control of a scarce resource or input D) economies of scale 3. Wendy has a monopoly in the retailing of motor homes. She can sell 5 per week at $21,000 each. If she wants to sell 6, she can charge $20,000 each. The quantity effect of selling the sixth motor home is: A) $20,000. B) $10,000. C) $15,000. D) $21,000. 4. Mr. Porter sells 10 bottles of champagne per week at a price of $55 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity and the price effects on total revenue would be, respectively: A) an increase of $450 and a decrease of $500. B) an increase of $495 and a decrease of $550. C) an increase of 1 bottle and a decrease of $5. D) an increase of $45 and a decrease of $100. Page 1
5. Bob owns a trout farm with monopoly power in Northern British Columbia. For Bob, his optimal output occurs where. Also, because of monopoly power, Bob's supply curve. A) marginal revenue equals marginal cost; does not exist B) marginal revenue exceeds marginal cost; does not exist C) marginal revenue equals marginal cost; is upward-sloping D) marginal revenue exceeds marginal cost; is perfectly inelastic 6. Suppose Professor Dumbledorr's magic hat monopoly is broken up and the magic hat industry becomes perfectly competitive. We would expect the to increase from the breakup and to decrease from the breakup. A) producer surplus; consumer surplus and total surplus B) consumer surplus; producer surplus and total surplus C) consumer surplus and total surplus; producer surplus D) producer surplus and total surplus; consumer surplus 7. A natural monopoly is one that: A) monopolizes a natural resource, such as a mineral spring. B) is based on control of something occurring in nature (such as diamonds). C) has economies of scale over the entire relevant range of output. D) typically has low fixed costs, making it easy and natural for it to shut out competitors. 8. Many airlines offer discounts for travelers who book their flights early. This is an example of that is in Canada. A) market power; illegal B) single-price monopoly power; legal C) price discrimination; illegal D) price discrimination; legal 9. A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the firm does not shut down. Compared to before the increase in marginal costs, the monopolist will its price and its level of production. A) raise; decrease B) not change; decrease C) raise; increase D) lower; increase Page 2
10. Which of the following is a barrier to entry for monopoly? A) control of an input essential for production B) government-created barriers such as patents C) the existence of significant economies of scale D) All of the above are barriers to entry. Multiple Choice Answer Key 1. D 2. C 3. A 4. D 5. A 6. C 7. C 8. D 9. A 10. D Page 3
Short Answer Question The movie theatre in Kingston serves two kinds of customers: students and professors. There are 900 students and 100 professors in Kingston. Each student s willingness to pay for a movie ticket is $5. Each professor s willingness to pay for a movie ticket is $10. Each will buy at most one ticket. The movie theatre s marginal cost per ticket is constant at $3 and there is no fixed cost. a. Suppose the movie theatre cannot price-discriminate and needs to charge both students and professors the same price per ticket. If the movie theatre charges $5 who will buy movie tickets and what will the movie theatre s profit be? How large is consumer surplus? b. If the movie theatre changes a price of $10, who will buy movie tickets and what will the movie theatre s profit be? How large is consumer surplus? c. Now suppose that, if it chooses to, the movie theatre can price-discriminate between students and professors by requiring students to show their student ID. If the movie theatre charges students $5 and professors $10, how much profit will the movie theatre make? How large is consumer surplus? Short Answer Solutions a. if the movie theatre charges $4 per ticket both students and professors will buy tickets. The movie theatre will sell to 1,000 customers at a price of $5 each. Since the movie theatres cost per ticket is $3 its profit is $2 per ticket for a total profit of 1,000 x $2 = 2,000. Students will experience no consumer surplus, and each of the 100 professors experiences consumer surplus s of $10 - $5 = $5 for a total consumer surplus of 100 x $5=\ $500. b. If the movie theatre charges $10 per ticket, only professors will buy tickets. The movie theater will sell to 100 customers at a price of $100 each.. Since the movie theatres cost per ticket is $3 its profit is $7 per ticket for a total profit of 100 x $7 = $700. Each of the 100 professors experiences no consumer surplus. Consumer surplus = 0 c. If the move theater charges a price of $5 to students, it sells 900 student tickets at a profit to the theatre of $5-$3 = $2 each, for a profit from selling to students of 900 x $2 = $1,800. And charging $10 to professors, it sells 100 tickets to professors at a profit to the theatre of $10 - $3 = $7 each, for a profit from selling to professors of 100 x $7 = $700. The theatre s total profit therefore is $1,800 + $700 = $2,500. Since customers are charged exactly their willingness to pay, there is no consumer surplus. Page 4
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