Question

1. Which of the following does not contribute to the existence of monopoly power?

   		A continuously decreasing long-run average cost curve
   		The possession of a patent
   		The control of essential inputs in the production process
   		A pure cost or quality advantage
   		A relatively inelastic market demand curve

10 points   

QUESTION 2

1. Industry demand is given by P = 200 – 0.6Q. The long-run industry costs are such that: LAC = LMC = $40. Based on this information, the number of units bought/sold under pure monopoly in the long run is ____.

   Hint: Write your answer to two decimal places.

10 points   

QUESTION 3

1. Which of the following is true of a pure monopoly?

   		A pure monopoly can raise the market price indefinitely.
   		A pure monopoly is typically more efficient than other firms in the market.
   		A pure monopoly faces a horizontal demand curve.
   		A pure monopoly restricts output below the competitive level.
   		A pure monopoly produces at the level where price equals marginal cost.

10 points   

QUESTION 4

1. A monopolist produces and sells 300 units at a price of $38 per unit. The monopolist’s marginal cost is equal to $15 and average cost is equal to $26. The monopolist’s profit is:

10 points   

QUESTION 5

1. Industry demand is given by P = 200 – 1Q. The long-run industry costs are such that: LAC = LMC = $40. Based on this information, the number of units bought/sold under perfect competition in the long run is ____.

   Hint: Write your answer to two decimal places.

10 points   

QUESTION 6

1. A market is considered a pure monopoly when:

   		all firms in the market sell homogeneous goods.
   		there is a single buyer for the goods produced in the market.
   		the firm produces a good that has imperfect substitutes.
   		a single firm produces a good that has no close substitutes.
   		there are low entry barriers in the market.

10 points   

QUESTION 7

1. Under patent protection, a firm has a monopoly in the production of a high-tech component. Market demand is estimated to be P = 100 – 0.4Q. The firm’s economic costs are given by AC = MC = $30 per component. The deadweight loss from the monopoly of this patent compared to the perfectly competitive outcome is ____.

   Hint: Write your answer to two decimal places.

   Hint two: Calculate the quantities/prices for the monopoly case and the pure competition case to solve.

10 points   

QUESTION 8

1. Compared to a perfectly competitive industry, a monopolist will generally produce:

   		a greater level of output a lower price.
   		a greater level of output at a higher price.
   		a smaller level of output a lower price
   		a smaller level of output at a higher price.
   		roughly the same level of output but at a higher price.

Answer 1

(1) (E)

Inelastic demand curve is not a barrier to entry giving rising to monopoly power.

(2)

P = 200 - 0.6Q

TR = P x Q = 200Q - 0.6Q²

MR = dTR/dQ = 200 - 1.2Q

Equating MR and MC,

200 - 1.2Q = 40

1.2Q = 160

Q = 133.33

(3) (D)

A pure monopoly equates MR and MC, so its output is lower than perfectly competitive (efficient) output.

(4)

Profit = Q x (P - ATC) = 300 x $(38 - 26) = 300 x $12 = $3600

(5)

In long run equilibrium, P = LAC = LMC

200 - Q = 40

Q = 160.00

(6) (D)

(7)

TR = P x Q = 100Q - 0.4Q²

MR = dTR/dQ = 100 - 0.8Q

For a monopoly, MR = MC.

100 - 0.8Q = 30

0.8Q = 70

Q = 87.5

P = 100 - (0.4 x 87.5) = 100 - 35 = 65

For perfect competition, P = MC.

100 - 0.4Q = 30

0.4Q = 70

Q = 175

P = MC = 30

Deadweight loss = (1/2) x Change in P x Change in Q = (1/2) x (65 - 30) x (175 - 87.5) = (1/2) x 35 x 87.5 = 1531.25

(8) (D)

Monopoly output is lower than and price is higher than competitive outcome.