Homework 5

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Homework #5 Econ 101 Sections 1 & 4 Due: Wednesday, 2 April 2003

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1) Which of the following is NOT a characteristic of a monopolist?
A) the fact that producing where MR = MC gives the firm the maximum profit
B) the ability to set its price above marginal cost
C) the ability to set its price
D) the ability to raise its price without causing total revenue to decrease

2) For a single-price monopolist, marginal revenue is less than price because


A) the revenue gain from the last unit sold is offset by a revenue loss on the units that previously had been
sold at a higher price.
B) the price does not have to be lowered on all previous units sold.
C) total revenue always decreases as output increases.
D) the revenue gain from the last unit sold is offset by further gains in price on units not sold at all.

3) In order to be able to price discriminate and maximize profit, a monopolist must be able to do all of the
following EXCEPT
A) sell a product that cannot be resold.
B) identify and separate different buyer types.
C) determine the output where marginal revenue equals marginal cost.
D) identify competitors.

4) When a person lobbies Congress to grant the person the exclusive right to sell a particular good, such
lobbying activity is called
A) revenue abatement. B) rent seeking.
C) profit recovery. D) revenue seeking.

5) Which of the following statements applies to a single-price monopolist?


A) In order to maximize profits, the monopolist should only produce an output in the inelastic range of its
supply.
B) In order to maximize profits, the monopolist should only produce an output that lies in the elastic range
of its demand.
C) In order to maximize profits, the monopolist should only produce an output that lies in the inelastic
range of its demand.
D) In order to maximize profits, the monopolist should produce where its demand is unit elastic.

6) Buying a monopoly from the existing owner does not ensure an economic profit because
A) the market for monopolies is a monopoly.
B) of the deadweight loss triangle.
C) competition among buyers drives up the cost of buying the firm.
D) profits equal zero in the long run anyway.

7) Which of the following is true about a perfect price discriminating monopolist?


A) There is no consumer surplus. B) There is zero economic profit.
C) There is inefficiency. D) All consumers pay marginal cost.
8) In the figure above, the curve labeled “W” can be a
A) perfectly competitive firm's marginal revenue curve.
B) perfectly competitive firm's demand curve.
C) monopoly's marginal revenue curve.
D) monopoly's demand curve.

9) When a monopolist can price discriminate between two groups, it is profit maximizing to charge the
lower price in the market with
A) less perfect demand. B) more customers.
C) lower average willingness to pay. D) higher average willingness to pay.

10) A strategy of setting price below the monopoly profit-maximizing price in order to deter entry is
known as
A) unlimited pricing. B) contestable pricing.
C) limit pricing. D) entry pricing.

11) A collusive agreement to restrict output and increase prices in the United States is
A) the key tool used by oligopolists.
B) illegal.
C) legal.
D) the key tool used by monopolistic competitors.

12) Which of the following is a characteristic of monopolistic competition?


A) mutual interdependence B) many firms
C) barriers to entry D) standardized product
13) The above figure shows the kinked demand curve for an oligopolist. The firm's MC curve is horizontal.
Which of the following statements is true?
A) If the marginal cost exceeds $30, the firm will set its price where its demand is relatively inelastic.
B) If marginal cost is $30, the firm will shut down.
C) If the marginal cost exceeds $30, the firm definitely will shut down.
D) If the marginal cost is between $10 and $30, the firm will produce 3 units.

14) In the kinked demand curve model,


A) the break in the marginal revenue curve prevents firms from maximizing profits.
B) the break in the demand curve prevents firms from maximizing profits.
C) small changes in marginal cost will not result in changes in the price or quantity.
D) each firm believes that its competitors' demand curves are kinked, but its demand curve is not kinked.

15) In the long run, a firm in


A) monopolistic competition will produce where P = ATC.
B) an oligopoly will produce where P = MC.
C) an oligopoly will produce where P = ATC.
D) monopolistic competition will produce where P = MC.
16) The above figure shows the demand and cost curves for a firm in monopolistic competition. The firm
maximizes its profit by
A) producing 12 units at a price of $10 each.
B) producing 8 units at a price of $15 each.
C) producing 4 units at a price of $20 each.
D) producing 8 units at a price of $5 each.

17) The primary source of long-run economic profit for a monopoly is


A) many buyers. B) inelastic demand.
C) barriers to entry. D) price discrimination.

18) Which of the following is FALSE for a profit-maximizing single-price monopolist?


A) P = MC
B) P > MR
C) MC = MR
D) None of the above because they are all true.

19) Small pizza parlors exist in just about every town. Anyone can open a pizza parlor, and the pizzas from
one parlor typically have different tastes and sizes than pizzas from another parlor. Thus, the pizza industry
is an example of
A) monopoly. B) oligopoly.
C) monopolistic competition. D) perfect competition.

20) Cartels are typically subject to cheating by their members because


A) the U.S. Justice Department will punish any cartel agreement before the cartel has had a chance to
operate.
B) product differentiation allows the cartel firms to cheat.
C) barriers to entry do not exist for these firms so that new entrants will join.
D) a firm can increase its profits by cutting its price if other firms stick to the agreement.
21) The figure above shows the demand and cost curves for a single-price monopolist. The firm's
economic profit equals
A) $0. B) $50. C) $300. D) $100.

22) The above figure shows the demand and cost curves for a firm in monopolistic competition. The graph
represents the firm's situation in
A) only the long run. B) only the short run.
C) neither the short run nor the long run. D) either the short run or the long run.
23) Compared to a similar perfectly competitive industry, a single-price monopoly
A) is more efficient because there is no wasteful competition.
B) might or might not reduce output.
C) creates a deadweight loss and decreases economic profit.
D) creates a deadweight loss and decreases consumer surplus.

ESSAY. Write your answer in the space provided below. 2 POINTS


24) Explain why firms in monopolistic competition have excess capacity in the long run.

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