## Microeconomics Study Set 46

Business

## Quiz 9 :

Market Power and Monopoly

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Q04 Q04 Q04

A medical device manufacturer sells its sterilization equipment in a market with an inverse demand curve of P = 6,000 - 400Q, where Q measures the number of sterilizers in thousands and P is the price per unit. The marginal cost of production is constant at $4,000. The profit-maximizing price is $____.

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Multiple Choice

Q13 Q13 Q13

A firm can produce any quantity of good X with the following cost structure: TC = 450,000 + 20Q, where Q measures units of output. The industry demand for good X is Q = 100,000 - 500P. At the profit-maximizing output level, the firm's ATC of production is $____.

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Multiple Choice

Q21 Q21 Q21

Suppose the American Girl doll company has an inverse demand curve of P = 150 - 0.25Q, where Q measures the quantity of dolls per day and P is the price per doll. The marginal cost is given by MC = 10 + 0.50Q. What is the total surplus at the profit-maximizing output level?

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Multiple Choice

Q22 Q22 Q22

Which of the following statements is (are) TRUE?
I) A firm with market power maximizes profit by producing so that P = MC or MR = MC.
II) If marginal revenue exceeds marginal cost, the firm should expand output to increase profits.
III) If a firm has no costs of production, it should continue producing until marginal revenue falls to zero.

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Multiple Choice

Q25 Q25 Q25

The inverse demand for a drug that treats melanoma (a skin cancer) is given by P = 3,000 - 10Q, where Q measures the number of drug treatments and P is the price per treatment. Suppose that the marginal cost per drug treatment is constant at $10. What is the profit-maximizing price per drug treatment?

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Multiple Choice

Q29 Q29 Q29

Which of the following statements is (are) TRUE?
I) A natural monopoly owes its existence to economies of scale.
II) In contrast to a monopoly industry, industries served by natural monopolies have no barriers to entry.
III) Natural monopolies have cost structures characterized by small fixed costs and steeply rising marginal costs.

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Multiple Choice

Q35 Q35 Q35

A drug company produces a new drug to treat baldness. The inverse demand curve for the drug is P = 205 - 20Q, where Q measures the number of pills in millions. The various costs of production are given by TC = 100 + 5Q, ATC = 5 + 100/Q, and MC = 5. If the government grants this firm a patent, it will earn profits of _____. If the government revokes the patent and the firm must sell its drug at marginal cost because of competition, it will earn profits or losses of _____.

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Multiple Choice

Q55 Q55 Q55

(Figure: Profit-maximizing Quantity and Price VI) Which of the following statements is (are) TRUE? I. The deadweight loss owing to market power is $225.
II) The price under perfect competition is $10.
III) Consumer surplus under perfect competition is higher than under monopoly by $337.50.

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Multiple Choice

Q61 Q61 Q61

A medical device manufacturer sells its sterilization equipment in a market with an inverse demand curve of P = 6,000 - 400Q, where Q measures the number of sterilizers in thousands and P is the price per unit. Suppose the Patient Protection and Affordable Care Act levies a tax on medical devices. Assume the tax raises the marginal cost of production from $4,000 to $4,400. After the tax, the profit-maximizing price ____ by $____.

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Multiple Choice

Q71 Q71 Q71

Consider the demand curves facing two firms: For curve 1, a $4 decrease in price increases quantity demanded by 2 units. For curve 2, a $3 decrease in price increases quantity demanded by 1 unit. Curve _____ is steeper, so an expansion of output drives down marginal revenue more along _____.

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Multiple Choice

Q72 Q72 Q72

In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a perfectly competitive market, the marginal cost is $60. If the marginal cost increased from $60 to $75, the monopoly would raise its price _____, and the price in the perfectly competitive market would _____.

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Multiple Choice

Q82 Q82 Q82

A firm can produce any quantity of good X with the following cost structure: TC = 450,000 + 20Q, where Q measures units of output. The industry demand for good X is Q = 100,000 - 500P. Suppose the profit-maximizing quantity for a single firm is split between two firms, both of which have the cost structure of TC = 450,000 + 20Q, where Q measures units of output. In this case, the average total cost for each firm is $____.

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Multiple Choice

Q86 Q86 Q86

Which of the following statements is (are) TRUE?
I) The Lerner index is zero for a perfectly competitive firm.
II) If P = $80 and MC = $60, the Lerner index = 0.25.
III) If the price elasticity of demand is 1.25, the Lerner index is 0.80.
IV) A higher price elasticity of demand leads to a higher price markup over marginal cost.

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Multiple Choice

Q88 Q88 Q88

A medical device manufacturer sells its sterilization equipment in a market with an inverse demand curve of P = 6,000 - 400Q, where Q measures the number of sterilizers in thousands and P is the price per unit. Suppose the Patient Protection and Affordable Care Act levies a tax on medical devices. Assume the tax raises the marginal cost of production from $4,000 to $4,400. After the tax, the profit-maximizing quantity ____ by ____.

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Multiple Choice

Q89 Q89 Q89

Suppose a firm's marginal cost is MC = 80 + 2Q, and its marginal revenue is MR = 200 - Q. Which of the following statements is (are) TRUE?
I) The profit-maximizing price is $180.
II) If Q = 20, MR > MC, so the firm should expand output to increase profits.
III) If Q = 50, MR < MC, so the firm should reduce output to increase profits.

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Multiple Choice

Q93 Q93 Q93

The inverse demand curve for a monopolist changes from P = 100 - 2Q to P = 120 - 2Q, while the marginal cost of production remains unchanged at a constant $20. After the change in the demand curve, the profit-maximizing price rises from _____, and the profit-maximizing output rises from _____.

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Multiple Choice

Q94 Q94 Q94

A medical device manufacturer sells its sterilization equipment in a market with an inverse demand curve of P = 6,000 - 400Q, where Q measures the number of sterilizers in thousands and P is the price per unit. The marginal cost of production is constant at $4,000. The profit-maximizing quantity is ____.

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Multiple Choice

Q97 Q97 Q97

The inverse demand curve for a monopolist changes from P = 200 - 0.25Q to P = 180 - 0.25Q, while the marginal cost of production remains unchanged at a constant $90. After the change in the demand curve, the price falls by _____ and the output falls by _____.

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Multiple Choice

Q100 Q100 Q100

(Figure: Profit-maximizing Quantity and Price VII) Which of the following statements is (are) TRUE? I. Consumer surplus under perfect competition is given by area A + B + C.
II) Producer surplus under monopoly is given by area B + D.
III) The deadweight loss from market power is area C.

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Multiple Choice

Q104 Q104 Q104

Which of the following statements is (are) TRUE?
I) If the government regulates the price of a natural monopoly such that price equals marginal cost, the natural monopolist may earn a negative profit.
II) Government regulation of natural monopolies is straightforward because regulators can precisely estimate the demand and cost conditions of regulated firms.
III) Government regulation based on production costs makes firms less likely to reduce costs if lower costs lead to lower regulated prices.

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Multiple Choice

Q106 Q106 Q106

(Figure: Profit-maximizing Quantity and Price II) Which of the following statements is (are) TRUE? I. If the firm is producing 5 units of output, it should expand output to increase profits because P > MC.
II) At a price of $16, the firm's profits would rise if it raised its price.
III) The profit-maximizing quantity is 600 units.
IV) The profit-maximizing price is $13.

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Multiple Choice

Q110 Q110 Q110

In market A, a firm with market power faces an inverse demand curve of P = 10 - Q and a marginal cost that is constant at $2. In market B, a firm with market power faces an inverse demand curve of P = 8 - 0.75Q and a marginal cost of $2. Producer surplus in market A is _____ than in market B.

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Multiple Choice

Q113 Q113 Q113

Which of the following are sources of market power?
I) government-issued patents and copyrights
II) a Minnesota law requiring all new funeral homes to have an embalming room, which costs upward of $30,000, whether or not it is functional or will be used
III) a Portland, Oregon law that makes it a crime for limousine companies to charge less than $50 per ride

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Multiple Choice

Q125 Q125 Q125

A new product has a demand curve that can be expressed as
and the monopolist that produces it has a total cost curve of
where Q is output. Use calculus to solve for:
a. the profit-maximizing level of output.
b. the price the producer will charge to maximize its profits.

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Essay

Q127 Q127 Q127

Suppose that a monopolist's inverse demand curve can be expressed as:
P = 20,000 - Q

^{2}The monopolist's total cost curve is: TC = 8,000Q. a. Use calculus to determine the monopolist's marginal revenue curve. b. Use calculus to determine the monopolist's marginal cost curve. c. What is the monopolist's profit-maximizing level of output? d. What price should the monopolist charge to maximize its profit?Free

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Q128 Q128 Q128

Suppose that a monopolist's inverse demand curve can be expressed as:
P = 10,000 + 100Q - 10Q

^{2}. The monopolist's total cost curve is: TC = 5,000Q. a. Use calculus to determine the monopolist's marginal revenue curve. b. Use calculus to determine the monopolist's marginal cost curve. c. What is the monopolist's profit-maximizing level of output? d. What price should the monopolist charge to maximize its profit?Free

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Q129 Q129 Q129

Suppose a firm faces the demand curve
, which gives a constant price elasticity of demand of -2. To answer the next two questions, it will be helpful to recall the Lerner index.
a. If the firm's marginal cost is constant at $2, what are the profit-maximizing price and quantity?
b. If the firm's marginal cost increases to a constant $3, what are the profit-maximizing price and quantity?

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Q133 Q133 Q133

The inverse demand for a product is given by P = 400 - 5Q, where Q measures the number of units and P is the price per unit. Suppose that the marginal cost per unit is $100 + 5Q. Graph demand, marginal revenue, and marginal cost. The producer surplus at the profit-maximizing price and quantity will be _____.

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Q137 Q137 Q137

(Figure: Profit-maximizing Quantity and Price IX) Answer the following questions.
a. Suppose the figure represents a perfectly competitive industry. How does the flattening of the demand curve affect the equilibrium price and quantity?
b. Suppose the figure represents a monopolist. What is the monopolist's profit-maximizing price and quantity for demand curves D

_{1}and D_{2}? c. Redo your answer to b, assuming marginal cost changed to MC = 2Q.Free

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Q138 Q138 Q138

Suppose chocolate-covered prunes have a demand curve that can be expressed as
and the monopolist that produces them has a total cost curve of
, where Q is output.
a. Solve for the profit-maximizing level of output using calculus.
b. What price will the producer charge to maximize its profits?

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Q139 Q139 Q139

Consider a firm in a perfectly competitive market with total costs given by:
a. What is this firm's marginal cost function? Over what range of output are the firm's marginal costs decreasing? Increasing?
b. Suppose that market price is $10. What is this firm's profit-maximizing level of output?

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Q141 Q141 Q141

The inverse demand curve for a monopolist changes from P = 200 - 2Q to P = 100 - 4Q. The marginal cost of production remains unchanged at a constant $10. Its Lerner index at the profit-maximizing quantities goes from _____ to _____, indicating that its market power has _____.

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Q143 Q143 Q143

A firm can produce any quantity of good X with the following cost structure: TC = 450,000 + 20Q, where Q measures units of output.
a. What happens to the firm's average total cost of production as it expands output?
b. What type of firm is this?
c. The industry demand for good X is Q = 100,000 - 500P. At the profit-maximizing output level, calculate the firm's ATC of production.
d. Suppose the profit-maximizing output level you calculated to answer part c is split evenly between two firms, each with the cost structure given by TC = 450,000 + 20Q. What is the ATC of production in this two-firm industry?

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Q145 Q145 Q145

Answer the following questions.
a. A monopoly is considering spending fixed costs of $100,000 to develop in period 1 a new drug that will be sold in period 2. The demand curve in period 2 is Q = 100 - P, where Q is measured in hundreds of pills and P is the price per pill, and marginal cost is constant at $4. The drug will be granted patent protection in period 2, and there are no fixed costs of production in period 2. Will the monopoly spend $100,000 developing the drug during period 1 to sell it during period 2? If it does, what is the level of consumer surplus in period 2?
b. A monopoly is considering spending fixed costs of $100,000 to develop a new drug in period 1 that will be sold in period 2. The demand curve in period 2 is Q = 100 - P, where Q is measured in hundreds of pills and P is the price per pill, and marginal cost is constant at $4. The price of the drug will be regulated, set equal to marginal cost, in period 2, and there are no fixed costs of production in period 2. Will the monopoly spend $100,000 developing the drug in period 1 to sell it in period 2 at marginal cost? If it does, what is the level of consumer surplus in period 2?

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Q146 Q146 Q146

The inverse demand for a product is given by P = 400 - 5Q, where Q measures the number of units and P is the price per unit. Suppose that total cost is TC = 100Q + 2.5Q

^{2}with marginal cost per unit of MC = $100 + 5Q. Technological innovation reduces total cost to TC = 25Q + 2.5Q^{2}and marginal cost per unit to MC = $25 + 5Q. Identify equilibrium price and quantity before and after the cost reduction. How does profit change?Free

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Q147 Q147 Q147

A medical device manufacturer sells its sterilization equipment in a market with an inverse demand curve of P = 6,000 - 400Q, where Q measures the number of sterilizers in thousands and P is the price per unit. The marginal cost of production is constant at $4,000.
a. Solve for the profit-maximizing price and quantity.
b. The Patient Protection and Affordable Care Act, signed into law by President Barack Obama, levies a tax on medical devices. Suppose the tax raises the marginal cost of production from $4,000 to $4,400. What are the new profit-maximizing price and quantity?
c. The law calls for a 2.3% tax on a firm's total revenue, which leaves the marginal cost of production unchanged. This means that marginal revenue with the tax will equal 97.7% of the marginal revenue without the tax, or MR

_{tax}= 0.977MR_{no tax}. What are the profit-maximizing price and quantity under this scenario?Free

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Q152 Q152 Q152

Answer the following questions.
a. Graph the inverse demand curve P = 12 - Q. On your graph, identify the area of total revenue associated with 2 and then 3 units of output. Is marginal revenue of the third unit positive or negative?
b. Graph the inverse demand curve P = 12 - Q. On your graph, identify the area of total revenue associated with 9 and 10 units of output. Is marginal revenue of the tenth unit positive or negative?

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Q156 Q156 Q156

A monopolist serves market A with an inverse demand curve of P = 12 - Q. Another monopolist serves market B with an inverse demand curve of P = 22 - 2Q. Suppose that both monopolists have a constant marginal cost of $2. Calculate the producer surplus earned in each market. Why is producer surplus higher in market B than in market A?

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Q158 Q158 Q158

(Figure: Market for Wine Gift Baskets I) Zinfandelic, which sells wine gift baskets, faces the demand curve and marginal cost curve depicted in the graph. Solve for the following:
a. marginal revenue equation
b. profit-maximizing quantity
c. profit-maximizing price
d. At the profit-maximizing quantity, what is the price elasticity of demand?

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Q159 Q159 Q159

Suppose a firm faces the inverse demand curve
. The firm has the total cost curve
.
a. Assuming that the firm operates in the market, find the firm's profit maximizing output, price, and profit.
b. Given your answer to part a, would this firm stay in the market or exit?

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Q160 Q160 Q160

Suppose the demand curve for a firm is Q = 50 - 0.125P, where Q measures units of output and P is the price per unit.
a. Derive the firm's marginal revenue curve.
b. What is the value of marginal revenue at 10 units of output?
c. Graph the firm's demand and marginal revenue curve.

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Q161 Q161 Q161

A firm's demand curve is Q = 2 - 0.01P, where Q is measured in millions.
a. Derive the firm's marginal revenue curve.
b. Calculate the level of output at which marginal revenue is zero.
c. Calculate the level of output at which marginal revenue is -$50.
d. What is marginal revenue at Q = 0.50?

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Q162 Q162 Q162

(Figure: Profit-maximizing Quantity and Price VIII) Suppose the demand curve for the firm's product increases from D

_{1}to D_{2}. The firm's marginal cost is given by MC = 5Q. a. Solve for the change in the profit-maximizing quantity resulting from the increase in demand. b. Solve for the change in the profit-maximizing price resulting from the increase in demand.Free

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