Question

Luxottica - a monopoly in eyewear products (in fact there are other companies but Luxottica controls over 80% of production), can sell 1 eyeglass when the price is $30, 2 eyeglasses when the price is $25, 3 eyeglasses when the price is $20 and 4 eyeglasses when the price is $17. It can produce a maximum of 4 eyeglasses per minute. If the marginal cost of producing an eyeglass is $9 then

a	the firm will produce 4 eyeglasses in a minute since that is the maximum amount it can produce.

b	the firm will produce 4 eyeglasses per minute since the price of $17 at which it can sell 4 eyeglasses is greater than the marginal cost

c	the firm will produce and sell only 3 eyeglasses per minute as the marginal revenue from the 4th eyeglass is only $8 that is less than the marginal cost of $9

d	the firm will produce and sell only 2 eyeglasses per minute as that is the profit maximizing output for this firm

e

the firm does not know its profit maximizing output since it does not have any information about total cost. ________________ Monopoly is considered less efficient than a perfectly competitive industry because: a does not produce goods in different varieties b a monopoly ordinarily utilizes old-fashioned, inefficient technologies because they don’t need to be efficient to make profits. c monopoly produces lower output and charges higher price than perfectly competitive industry d under monopoly not all the surplus from trade would be realized e C and D are correct ________________________________ Which one of the following is not true about natural monopoly? a A. a natural monopoly occurs when economies of scale allow one firm to supply the entire market at the lowest possible cost. b B. A natural monopoly regulated with a marginal cost pricing rule results in an economic loss for the regulated firm. c C. A natural monopoly arises when a firm owns vital resource needed to produce a good. d D. A natural monopoly regulated with a average cost pricing rule results in an normal profit for the regulated firm. e E. Unregulated natural monopoly earns excess profit at the expense of a loss in consumer surplus. ___________________ 20. If IPL is regulated with an average cost principle, it would serve _________ households and charge ______ per household per month. (use the figure in question 19 to answer this question) a 20,000; $10 b 40,000; $10 c 20,000; $30 d 30,000; $20 e 20,000; $25 _____________________ 21. A natural monopoly regulated with an average cost pricing rule is ________ and there is _________. a efficient and incurs an economic loss; no deadweight loss b inefficient and makes zero economic profit; deadweight loss c inefficient and makes an economic profit; no deadweight loss d efficient and makes zero economic profit; deadweight loss e inefficient and mak

Answer 1

Profit maximizes at he points where MR= MC and MR = change in TR and TR = Px Q

Q	P	TR=PxQ	MR=dTR/dQ
1	30	30
2	25	50	20
3	20	60	10
4	17	68	8

At Q = 2, MC = MR

1. d. the firm will produce and sell only 2 eyeglasses per minute as that is the profit maximizing output for this firm

2. c. monopoly produces lower output and charges higher price than perfectly competitive industry. In long run, a monopolist does not produce at minimum average cost and hence is not productive efficient.

3. A. a natural monopoly occurs when economies of scale allow one firm to supply the entire market at the lowest possible cost. Monopolist never supplies at the minimum possible cost. He always tries to maximize his profits. Rest all are true about monopoly.

20. Figure not given

21. inefficient and makes zero economic profit; deadweight loss. A monopolist cannot produce at minimum average cost and hence cannot be efficient.

Average cost pricing means P = AC and profit = P-AC = zero.