Question

1. Which of the following is NOT a potential source of monopoly power?

a) patents and copyrights

b) control of scarce inputs

c) mark-up pricing

d) government franchise

2. A good is considered to be inferior of

a) the price elasticity of demand is between zero and one

b) the income elasticity of demand is negative

c) a cheaper good serves as a perfect substitute

3. Flynn Rider operates a falafel stand in the kingdom of Corona. As the only seller of falafel. Flynn serves the entire market (inverse) demand of P=250-2Q. Flynn has a constant average and marginal cost of $0.50 per serving with no fixed costs. Flynn's marginal revenue function is given by:

a) MR= 500-2Q

b) MR=-0.5Q

c) MR=250-4Q

d) P= 250-4Q

e) MR=250-Q

4. Flynn Rider operates a falafel stand in the kingdom of Corona. As the only seller of falafel. Flynn serves the entire market (inverse) demand of P=250-2Q. Flynn has a constant average and marginal cost of $0.50 per serving with no fixed costs. Flynn's profit maximizing monopoly output is

a) 62.375 servings

b) 187.125 servings

c) 249.75 servings

d) 124.5 servings

e) 166.67 servings

5. If the price elasticity of demand is -0.75, the, what change in price would cause quantity demanded to rise by 20%?

a) 15% increase in price

b) 26.67% increase in price

c) 15% decline in price

d) 19.25% decline in price

e) 26.67% decline in price

6. A natural monopoly has

a) less market power than a created monopoly

b) a long-run average cost curve that is everywhere upward sloping

c) diseconomies of scale

d) control of natural resources used in production

e) a lower average cost of producing the market demand than two or more firms would have

7. If the (inverse) demand for peanuts at a baseball game is given by P=5-0.02Q. What price will maximize the vendor's revenues?

a) $125

b) $5.00

c) $2.50

d) $12.50

e) $1.25

Answer 1

Question 1:

The correct answer is (d) because patents/copyrights, control of scarce inputs and mark up pricing are all characteristics of a monopoly power.

Question 2:

An inferior good is one for which the demand falls when the people's income goes up (or vice versa). Hence, income elasticity of demand for those goods is negative.

Thus, option (b) is the correct answer.

Question 3:

The firm is a monopolist as its serves the entire market. The demand (inverse) of the monopolist is given as

P = 250 - 2Q.

Now, total revenue is given by P*Q

Hence, Total revenue (TR)= P*Q =( 250-2Q)*Q = 250Q - 2Q2

Marginal revenue (MR) = dTR/dQ (first order derivative of TR with respect to Q)

or, MR = 250 - 4Q

Hence, we can say option (c) is the correct answer.

Question 4:

From the previous question, we have derived MR = 250 - 4Q

Also given that the firm has a AC=MC=0.50

By the monopoly profit maximization rule, MR=MC

Hence,

250 - 4Q = 0.50

or, 250-0.50 = 4Q

or, 249.5 = 4Q

or, Q = 249.5/4

or, Q = 62.375 (servings)

This is the profit maximizing monopoly output.

Thus, option (a) is the correct answer.

Question 5:

Price elasticity of demand measures the responsiveness or sensitivity of demand with respect to price change. If the price elasticity of demand is -0.75, it means that for every unit increase in price, the demand of the good (i.e.. quantity) falls by 0.75 units.

In other words, (if we express the above elasticity in percentage terms),

when price changes by 100%, the demand for good (i.e.. quantity) changes by -75%

Now, let's apply the idea of unitary method here:

When quantity changes by -75%, the price changes by 100%

When quantity changes by 1%, the price changes by percent

When quantity changes by 20%, the price changes by percent , i.e.. -26.67 %

Or, a 26.67% decline in prices

Hence option (e) is the correct answer.

Question 6:

A natural monopoly is typically found in industries which have high fixed costs and hence it is reasonable to allow only one firm to stay in business, rather than multiple firms. This is because, more firms mean the cost of production would be higher (as it is already a sector which requires high investment, like railways). Thus, a single firm can produce with lower average cost of production than two or more firms.

Hence, option (e) is the correct answer.

Question 7:

Inverse demand for peanuts is given by : P=5-0.02Q

Hence, the total revenue (TR) of the vendor will be given as P*Q

which means,

TR = P*Q = (5-0.02Q)*Q = 5Q - 0.02 Q2

In order to find the profit maximizing quantity, we will find first order derivative of TR with respect to Q and put the value equal to 0.

i.e.. dTR/dQ = 0

or, 5 - 0.04 Q = 0

or, 0.04Q = 5

or, Q = 5/0.04 = 125

This is the profit maximizing quantity for the vendor.

In order to get the profit maximizing price, we will put this value of Q in the inverse demand function:

P = 5 -0.02 Q = 5 - 0.02*125 = 5 - 2.50 = 2.50 (in dollars)

Hence, option (c) is the correct answer.