Question

40. Suppose the company E-bikes R US is the sole supplier of e-bikes. The more elastic the
demand curve faced by E-bikes R US, the monopolist
A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.

41. Suppose the company E-bikes R US is the sole supplier of e-bikes. As other e-bike firms
enter the market, the market power of E-bikes R US
A) is unaffected.
B) declines.
C) increases.
D) increases according to the Lerner Index but decreases according to the price/marginal cost
ratio.

42. Suppose the company E-bikes R US is the sole supplier of e-bikes and faces the following
inverse demand function: p = 100 - 2Q, and total cost is given by TC = 16q + 2. The
deadweight loss from E-bikes R US equals
A) $21.
B) $441.
C) $882.
D) $1,764.

Answer 1

40. Ans - d) will lose more sales as it raises its price

Explanation:

If the company faces a more elastic demand curve, this means that any increase in price will reduce sales because consumers will not purchase the good and look for alternatives. So the comapny will lose more sale when it raises its price.

41. Ans - B) declines.

Explanation:

The market power declines as more sellers enter in the market.

42. Ans - B) $441

Explanation:

Monopoly will produce where MR = MC

MR = 100- 4Q [ it has double slope of demand curve]

MC = 16

Mr = MC

100-4Q = 16

84 = 4Q

Qm = 21

Pm = 100-2*21 = 58 [ m represents monopoly]

For dead weight loss we need to find perfect competition (PC) quantity

In PC, firms produce where P = MC

100 - 2Q = 16

84 = 2Q

Qc = 42 [ C represent competitive market]

Pc = 100-2*42

Pc = 16

Dead weight loss = (1/2)*(Pm- Pc)*(Qc - Qm)

= (1/2)*(58-16)*(42-21)

= $441

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