Question

ANSWER THE FOLLOWING QUESTIONS 1a - i......

1.) If a monopolist is producing at a level of output where marginal revenue is greater than marginal cost, the monopolist will:

a) raise the price of its product. b) decrease output. c) increase output. d) shutdown the business.

1.a). A monopolist maximizes profit at a point where:

a) the price elasticity of demand is inelastic. b) the price elasticity of demand is elastic. c) the price elasticity of demand is unit elastic. d) the marginal revenue is negative.

1b.) In the range where a monopolist’s demand curve is inelastic:

a) marginal revenue is zero. b) marginal revenue is negative. c) total revenue is rising. d) average revenue is rising.

1c.) The deadweight loss of monopoly is due to the fact that:

a) monopolists do not maximize profits. b) monopolists produce at the point where marginal cost intersects the demand curve. c) monopolists restrict output in order to raise price. d) monopolists do not produce at the minimum point of the marginal cost curve.

1d.). Which of the following is an essential condition for a firm to be a natural monopoly? a) The control of a key input b) A downward sloping long-run average cost curve c) The government granting the firm a monopoly d) Firms having different cost functions

1e.). When a monopolist engages in perfect price discrimination:

a) there is a higher deadweight loss compared to a single-price monopoly. b) there is a deadweight loss because the firm charges a price below marginal cost. c) there is a deadweight loss equal to the lost consumer surplus. d) there is no deadweight loss as the monopolist successfully captures the entire consumer surplus.

1f.). Which of the following is not a necessary condition for price discrimination? 1

a) The firm having some degree of monopoly power b) The monopolist producing where price is equal to marginal cost c) The ability to roughly approximate each buyer’s maximum willingness to pay for each unit of a product d) The ability to prevent arbitrage among different segments of customers

1g.). Under which of the following situations will a monopolist, practicing third-degree price discrimination, be unable to discriminate prices among its different market segments?

a) When the price elasticity of demand in all markets are the same b) When the marginal cost of production remains stable c) When the average cost of production is lower than the marginal cost of production d) When the marginal revenue from the different markets varies

1H. A firm practicing third-degree price discrimination maximizes its profits by:

a) setting the price in each market segment equal to the marginal cost of servicing that market segment. b) charging a higher price to the market segment with the majority of customers and a lower price to the market segment with relatively less number of customers. c) charging a higher price to the customers with a relatively high elasticity of demand and a lower price to those with a relatively low elasticity of demand. d) charging a higher price to the customers with a relatively low price elasticity of demand and a lower price to those with a relatively high price elasticity of demand.

1I.). Which of the following is true of block pricing?

a) The price per unit charged by the monopolist declines as more units of the quantity are purchased by a consumer. b) There is no deadweight loss under this form of price discrimination. c) It decreases the monopolist’s profit by transferring the additional producer surplus on the initial units consumed to the consumers. d) This form of price discrimination allows a monopolist to sell each unit of output for the maximum price a consumer will pay.

Answer 1

1. c) increase output. By increasing output MR will decrease while MC will increase and they both will intersect at the point to maximize profit.

1.a. b) the price elasticity of demand is elastic. MC intersects MR when MR is decreasing and positive and prices are determined on AR above this point and demand curve is elastic here. Demand is unit elastic when MR is zero. Demand curve is inelastic when MR is negative.

1.b. b) marginal revenue is negative. MC intersects MR when MR is decreasing and positive and prices are determined on AR above this point and demand curve is elastic here. Demand is unit elastic when MR is zero. Demand curve is inelastic when MR is negative.

1.c. c) monopolists restrict output in order to raise price. If Monopolist produce till MC intersects demand curve and price equals marginal cost, there will be no dead weight loss. But monopoly restricts output at the point where MR = MC, and thus there is dead weight loss.