Chapter 11—Price and Output Determination: Monopoly and Dominant Firms

MULTIPLE CHOICE

1. Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopoly price?

Hint: P (1 +1/E) = MC.

a. $37.50

b. $41.25

c. $66.67

d. $75.00

e. $82.50

ANS: C PTS: 1

2. Land’s End estimates a demand curve for turtleneck sweaters to be:

Log Q = .41 + 2.3 Log Y – 3 Log P

where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of im-ported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:

a. P = $13.50

b. P = $26.50

c. P = $27.50

d. P = $34.50

e. P = $56.22

ANS: A PTS: 1

3. Declining cost industries

a. have upward rising AC curves.

b. have upward rising demand curves.

c. have -shaped total costs.

d. have diseconomies of scale.

e. have marginal cost curves below their average cost curve.

ANS: E PTS: 1

4. A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 – 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 – 6 Q. (Pick closest answer)

a. Q = 10

b. Q = 15

c. Q = 22

d. Q = 37

e. Q = 41

ANS: A PTS: 1

5. Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 – .20•Q and its total cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public Supply is UNREGULATED, find Globo’s optimal price.

a. $206

b. $106

c. $56

d. $6

e. $3

ANS: B PTS: 1

6. A monopolist faces the following demand curve: P = 12 – .3Q with marginal costs of $3. What is the monopolistic PRICE?

a. P = $5.50

b. P = $6.50

c. P = $7.50

d. P = $8.50

e. P = $9.50

7.

8.

9.

10.

11.

12.

ANS: C PTS: 1

7. In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

a. price would equal average cost.

b. price would exceed average cost.

c. price would be below average cost.

d. price would be at the profit maximizing level for natural monopoly

e. all of the above

ANS: A PTS: 1

8. The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:

a. at an output greater than the output where average costs are minimized

b. at an output short of that output where average costs are minimized

c. at an output equal to industry output under pure competition

d. a and c

e. none of the above

ANS: B PTS: 1

9. In the case of pure monopoly:

a. one firm is the sole producer of a good or service which has no close substitutes

b. the firm’s profit is maximized at the price and output combination where marginal cost equals marginal revenue

c. the demand curve is always elastic

d. a and b only

e. a, b, and c

ANS: D PTS: 1

10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.

a. true

b. false

ANS: B PTS: 1

11. The demand curve facing the firm in ____ is the same as the industry demand curve.

a. pure competition

b. monopolistic competition

c. oligopoly

d. pure monopoly

e. none of the above

ANS: D PTS: 1

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