## ECO402 final term solve paper January 2012 Virtual university of Pakistan

1. When the demand curve is downward sloping, marginal revenue is

equal to price.
equal to average revenue.
less than price.
more than price.

2. For the monopolist shown below, the profit maximizing level of output is:

a. Q1.
Q2.
Q3.
Q4.
Q5.

3. How much profit will the monopolist whose cost and demand curves are shown below earn at output Q1?

0CDQ1.
0BEQ1.
0AFQ1.
ACDF.
e. BCDE.

4. Which of the following is NOT true regarding monopoly?

Monopoly is the sole producer in the market.
Monopoly price is determined from the demand curve.
c. Monopolist can charge as high a price as it likes.
Monopoly demand curve is downward sloping.

5. Which of the following is true at the output level where P=MC?

The monopolist is maximizing profit.
The monopolist is not maximizing profit and should increase output.
c. The monopolist is not maximizing profit and should decrease output.
The monopolist is earning a positive profit.

6. Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ______________ price and sell a ______________ quantity.

higher; larger
lower; larger
c. higher; smaller
lower; smaller
none of these

7. Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

firm is maximizing profit.
b. firm's output is smaller than the profit maximizing quantity.
firm's output is larger than the profit maximizing quantity.
firm's output does not maximize profit, but we cannot conclude whether the output is too large or too small.

8. To find the profit maximizing level of output, a firm finds the output level where

price equals marginal cost.
marginal revenue and average total cost.
price equals marginal revenue.
all of the above.
e. none of the above.

9. As the manager of a firm you calculate the marginal revenue is \$152 and marginal cost is \$200. You should

expand output.
c. reduce output until marginal revenue equals marginal cost.
expand output until marginal revenue equals zero.
reduce output beyond the level where marginal revenue equals zero.

10. Suppose that a firm can produce its output at either of two plants. If profits are maximized, which of the following statements is true?

The marginal cost at the first plant must equal marginal revenue.
The marginal cost at the second plant must equal marginal revenue.
The marginal cost at the two plants must be equal.
d. all of the above.
none of the above.

11. The monopolist has no supply curve because

a. the quantity supplied at any particular price depends on the monopolist's demand curve.
the monopolist's marginal cost curve changes considerably over time.
the relationship between price and quantity depends on both marginal cost and average cost.
there is a single seller in the market.
although there is only a single seller at the current price, it is impossible to know how many sellers would be in the market at higher prices.

12. When a per unit tax is imposed on the sale of a product of a monopolist, the resulting price increase will

always be less than the tax.
always be more than the tax.
always be less than if a similar tax were imposed on firms in a competitive market.
d. not always be less than the tax.

13. The monopoly supply curve is the

same as the competitive market supply curve.
portion of marginal costs curve where marginal costs exceed the minimum value of average variable costs.
result of market power and production costs.
d. none of the above.

14. For a monopolist, changes in demand will lead to changes in

price with no change in output.
output with no change in price.
c. both price and quantity.
any of the above can be true.

15. Use the following two statements to answer this question:

I. For a monopolist, at every output level, average revenue is equal to price.

II. For a monopolist, at every output level, marginal revenue is equal to price.

Both I and II are true.
b. I is true, and II is false.
I is false, and II is true.
Both I and II are false.
Statements I and II could either be true or false depending upon demand.

16. Which of the following is NOT true for monopoly?

The profit maximizing output is the one at which marginal revenue and marginal cost are equal.
Average revenue equals price.
The profit maximizing output is the one at which the difference between total revenue and total cost is largest.
The monopolist's demand curve is the same as the market demand curve.
e. At the profit maximizing output, price equals marginal cost.

17. If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:

negative.
b. positive.
zero.
indeterminate from the given information.

18. A monopolist has equated marginal revenue to zero. The firm has:

maximized profit.
b. maximized revenue.
minimized cost.
minimized profit.

19. A monopolist has determined that at the current level of output the price elasticity of
demand is -0.15. Which of the following statements is true?

a. The firm should cut output.
This is typical for a monopolist; output should not be altered.
The firm should increase output.
None of the above is necessarily correct.

20. A monopolist has set her level of output to maximize profit. The firm's marginal revenue is \$20, and the price elasticity of demand is -2.0. The firm's profit maximizing price is approximately:

\$0
\$20
c. \$40
\$10
This problem cannot be answered without knowing the marginal cost.

Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows:

21. Refer to Scenario 1. How much output will Barbara produce?

0
22
56
72
none of the above

22. Refer to Scenario 1. The price of her product will be _____.

4
b. 22
32
42
72

23. Refer to Scenario 1. How much profit will she make?

-996
0
c. 1,296
1,568
none of the above

A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product:

Q = 200 - 2P

MR = 100 - Q

TC = 5Q

MC = 5

24. Refer to Scenario 2. What level of output maximizes total revenue?

0
90
95
d. 100
none of the above

25. Refer to Scenario 2. What is the profit maximizing level of output?

0
90
c. 95
100
none of the above

26. Refer to Scenario 2. What is the profit maximizing price?

\$95.00.
\$5.00.
c. \$52.50.
\$10.00.

27. Refer to Scenario 2. How much profit does the monopolist earn?

a. \$4512.50.
\$4987.50.
\$475.00.
\$5.00.

28. Refer to Scenario 2. Suppose that a tax of \$5 for each unit produced is imposed by state government. What is the profit maximizing level of output?

0
b. 90
95
100
none of the above

29. Refer to Scenario 2. Suppose that a tax of \$5 for each unit produced is imposed by state government. What is the profit maximizing price?

\$90.00.
\$10.00.
c. \$55.00.
\$52.50.

30. Refer to Scenario 2. Suppose that a tax of \$5 for each unit produced is imposed by state government. How much profit does the monopolist earn?

a. \$4050.
\$4950.
\$450.
\$5.

31. Refer to Scenario 2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs \$1000. What happens to profit?

It increases by \$1000.
b. It decreases by \$1000.
It decreases by less than \$1000.
It stays the same.

32. Refer to Scenario 2. Suppose that in addition to the tax, a business license is required to stay in business. The license costs \$1000. What is the profit maximizing level of output?

0
b. 90
95
100
none of the above

The demand curve and marginal revenue curve for red herrings are given as follows:

Q = 250 - 5P

MR = 50 - 0.4Q

33. Refer to Scenario 3. What level of output maximizes revenue?

0
45
85
d. 125
245

34. Refer to Scenario 3. The marginal cost of red herrings is given as: MC = 0.6Q. What is the profit-maximizing level of output?

0
25
c. 50
60
125

35. Refer to Scenario 3. At the profit-maximizing level of output, demand is

completely inelastic.
inelastic, but not completely inelastic.
unit elastic.
d. elastic, but not infinitely elastic.
infinitely elastic.

36. Refer to Scenario 3. Compared to a competitive red herring industry, the monopolistic red herring industry

produces more output at a higher price.
b. produces less output at a higher price.
produces more output at a lower price.
produces less output at a lower price.
not enough information to relate the monopolistic red herring industry to a competitive industry.

37. Refer to Scenario 3. Suppose that a tax of \$5 per unit of output is imposed on red herring producers. The price of red herring will

not change.
b. increase by less than \$5.
increase by \$5.
increase by more than \$5.
decrease.

The demand for tickets to the Meat Loaf concert (Q) is given as follows:

Q = 120,000 - 2,000P

The marginal revenue is given as:

MR = 60 - .001Q

The stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point.

38. Refer to Scenario 4. Given the information above, what are the profit maximizing number of tickets sold and the price of tickets?

0, \$60
20,000, \$50
40,000, \$40
d. 60,000, \$30
80,000, \$20

39. Refer to Scenario 4. Suppose that the municipal stadium authority imposes a tax of \$10 per ticket on the concert promoters. Given the information above, the profit maximizing ticket price would

increase by \$10.
b. increase by \$5.
not change.
decrease by \$5.
decrease by \$10.

40. Refer to Scenario 4. A multiplant monopolist can produce her output in either of two plants. Having sold all of her output she discovers that the marginal cost in plant 1 is \$30 while the marginal cost in plant 2 is \$20. To maximize profits the firm will

produce more output in plant 1 and less in the plant 2.
c. produce less output in plant 1 and more in plant 2.
produce less in both plants until marginal revenue is zero.
shut down plant 1 and only produce at plant 2 in the future.

A firm produces garden hoses in California and in Ohio. The marginal cost of producing garden hoses in the two states and the marginal revenue from producing garden hoses are given in the following table:

California

Ohio

Qc

MCc

Qo

MCo

Qc+o

MR

1

2

1

3

1

24

2

3

2

4

2

20

3

5

3

6

3

16

4

9

4

8

4

12

5

16

5

12

5

8

6

24

6

17

6

4

41. Refer to Scenario 5. From the perspective of the firm, what is the marginal cost of the 5th garden hose?

4
b. 5
16
12
8

42. Refer to Scenario 5. How many garden hoses should be produced in California in order to maximize profits?

1
2
c. 3
4
5

John is the manufacturer of red rubber balls (Q). He has a red rubber ball manufacturing plant in California, Florida and Montana. The total cost of producing red rubber balls at each of the three plants is given by the following table:

California

Florida

Montana

Qc

TCc

Qf

TCf

Qm

TCm

1

5

1

8

1

4

2

10

2

16

2

8

3

15

3

24

3

12

4

20

4

32

4

16

5

25

5

40

5

20

6

30

6

48

6

24

7

35

7

56

7

28

8

40

8

64

8

32

9

45

9

72

9

36

10

50

10

80

10

40

11

infinity

11

infinity

11

infinity

43. Refer to Scenario 6. If red rubber balls can be produced at any of the three plants, what is the marginal cost of 5th red rubber ball?

a. 4
5
8
20
none of the above

44. Refer to Scenario 6. If red rubber balls can be produced at any of the three plants, and John decides to produce 1 red rubber ball, at which plant will he produce it?

California
Florida
c. Montana
he is indifferent between California and Florida
he is indifferent between Florida and Montana

45. The demand curve and marginal revenue curve for red rubber balls are given as follows:

Q = 16 - P MR = 16 - 2Q

What level of output maximizes profit?

0
4
5.5
d. 6
(b), (c) and (d) all maximize profit.

46. What is the profit maximizing price?

a. 10
20
3
40
none of the above

47. At the profit-maximizing level of output, demand is

completely inelastic.
inelastic, but not completely inelastic.
unit elastic.
d. elastic, but not infinitely elastic.
infinitely elastic.

48. Suppose that a tax of \$2 per unit of output is imposed on red rubber ball producers. What level of output maximizes profit?

-1
3
4.5
d. 5
(b), (c) and (d) are correct

49. After the imposition of a tax of \$2 per unit of output, what is the profit maximizing price?

a. 11
21
31
41
none of the above

The marginal revenue of green ink pads is given as follows:

MR = 2500 - 5Q

The marginal cost of green ink pads is 5Q.

50. Refer to Scenario 7. How many ink pads will be produced to maximize revenue?

0
250
300
500
none of the above

51. Refer to Scenario 7. How many ink pads will be produced to maximize profit?

50
b. 250
500
800
none of the above

52. Refer to Scenario 7. Suppose that the firm chooses to produce 200 ink pads. At this level of output the demand for ink pads is

inelastic.
unit elastic.
c. elastic.
d. unit elastic.

53. The marginal cost of a monopolist is constant and is \$10. The marginal revenue curve is given as follows:

MR = 100 - 2Q

The profit maximizing price is

\$70
\$65
\$60
d. \$55
\$50

54. A multiplant firm has equated marginal costs at each plant. By doing this

profits are maximized.
b. costs are minimized given the level of output.
revenues are maximized given the level of output.
none of the above.

55. The _____ elastic a firm's demand curve, the greater its _____.

a. less; monopoly power
less; output
more; monopoly power
more; costs

56. Monopoly power results from the ability to

set price equal to marginal cost.
equate marginal cost to marginal revenue.
set price above average variable cost.
d. set price above marginal cost.

57. What is the value of the Lerner index under perfect competition?

1
b. 0
infinity
two times the price

58. The more elastic the demand facing a firm,

the higher the value of the Lerner index.
b. the lower the value of the Lerner index.
the less monopoly power it has.
the higher its profit.

59. The Lerner index measures

a firm's potential monopoly power.
b. the amount of monopoly power a firm chooses to exercises when maximizing profits.
a firm's potential profitability.
an industry's potential market power.

60. Assume that a firm's marginal cost is \$10 and the elasticity of demand is -2. We can conclude that the firm's profit maximizing price is approximately

a. \$20.
\$5.
\$10.

61. Use the following two statements to answer this question:

I. A firm can exert monopoly power if and only if it is the sole producer of a good.

II. The degree of monopoly power a firm possesses can be measured using the Lerner Index: L=(P-AC)/AC.

Both I and II are true.
I is true, and II is false.
I is false, and II is true.
d. Both I and II are false.

62. Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be:

to decrease the price of rice to the Japanese people.
b. to decrease the consumer surplus of Japanese rice consumers.
to decrease the producer surplus of Japanese rice producers.
a welfare gain for the Japanese people.
increase the consumption of rice by the Japanese people.

63. Which of the following is NOT associated with a high degree of monopoly power?

A relatively inelastic demand curve for the firm.
A small number of firms in the market.
c. Significant price competition among firms in the market.
Significant barriers to entry.

64. Which factors determine the firm's elasticity of demand?

Elasticity of market demand and number of firms.
Number of firms and the nature of interaction among firms.
c. Elasticity of market demand, number of firms, and the nature of interaction among firms.
None of the above.

65. When a drug company develops a new drug it is granted a _____ making it illegal for other firms to enter the market until the _____ expires.

franchise; franchise
d. patent; patent

66. The firms in a market have decided not to compete with one another and have agreed to limit output and raise price.

This practice is known as concentrating and is legal in the United States and Canada.
b. This practice is known as collusion and is illegal in the United States.
In this way firms take advantage of economies of scale.
This is an effective barrier to entry, but is illegal in the United States.

67. Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms?

a. When there are few firms in the market and the demand curve faced by each firm is relatively inelastic.
When there are many firms in the market and the demand curve faced by each firm is relatively inelastic.
When there are few firms in the market and the demand curve faced by each firm is relatively elastic.
When there are many firms in the market and the demand curve faced by each firm is relatively elastic.

Figure 10.1

The revenue and cost curves in the diagram above are those of a natural monopoly.

68. Refer to Figure 10.1. If the monopolist is not regulated, the price will be set at _____.

P1
b. P2
P3
P4
none of the above

69. Refer to Figure 10.1. Suppose that the government decides to limit monopoly power with price regulation. If the government sets the price at the competitive level, it will set the price at _____.

P1
P2
P3
d. P4
none of the above

70. Refer to Figure 10.1. The minimum feasible price is _____.

P1
P2
c. P3
P4
none of the above

71. With respect to monopolies, deadweight loss refers to the

socially unproductive amounts of money spent to obtain or acquire a monopoly.
b. net loss in consumer and producer surplus due to a monopolists pricing strategy/policy.
lost consumer surplus from monopolistic pricing.
none of the above.

72. The regulatory lag:

always benefits the regulated firm.
b. is likely to occur with rate-of-return regulation.
promotes economic efficiency.
all of the above.

73. The monopolist that maximizes profit

a. imposes a cost on society because the selling price is above marginal cost.
imposes a cost on society because the selling price is equal to marginal cost.
does not impose a cost on society because the selling price is above marginal cost.
does not impose a cost on society because price is equal to marginal cost.

74. Deadweight loss from monopoly power is expressed on a graph as the area between the

competitive price and the average revenue curve bounded by the quantities produced by the competitive and monopoly markets.
competitive price line and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.
competitive price line and the monopoly price line bounded by zero output and the output chosen by the monopolist.
d. average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.

75. Which of the following is true when the government imposes a price ceiling on a monopolist?

Marginal revenue becomes horizontal.
Marginal revenue is linear.
c. Marginal revenue is kinked--horizontal and then downward sloping.
Marginal revenue is kinked--downward sloping and then horizontal.

76. If the regulatory agency sets a price where AR=AC for a natural monopoly, output will be

equal to the competitive level.
equal to the monopoly profit maximizing level.
c. greater than the monopoly profit maximizing level and less than the competitive level.
greater than the competitive level.

77. If a monopolist's profits were taxed away and redistributed to its consumers,

a. inefficiency would remain because output would be lower than under competitive conditions.
inefficiency would remain, but not because output would be lower than under competitive conditions.
efficiency would be obtained because output would be increased to the competitive level.
efficiency would be obtained because output would be increased and profits removed.

78. Which of the following statements about natural monopolies is true?

Natural monopolies are in the markets for natural resources (like crude oil and coal).
b. For natural monopolies, marginal cost is always below average cost.
For natural monopolies, average cost is always increasing.
Natural monopolies cannot be regulated.

Figure 10.2

79. Refer to Figure 10.2. At output Qm, and assuming that the monopoly has set her price to maximize profit, the consumer surplus is:

a. CDE.
BDEF.
0DEQm.
none of the above.

80. Refer to Figure 10.2. In moving from the competitive level of output and price to the monopoly level of output and price, the monopolist is able to add to producer surplus:

the area BCEF.
b. the area BCEF less the area GFH.
the area BCEH.
the area BCEH less the area GFH.
none of the above.

81. Refer to Figure 10.2. In moving from the competitive level of output and price to the monopoly level of output and price, the deadweight loss is the area:

QmEHQc.
b. GEH.
GFH.
FEH.
none of the above.

Use the following information to answer the next question:

The marginal cost of a monopolist is constant and is \$10. The demand curve and marginal revenue curves are given as follows:

demand: Q = 100 - P

marginal revenue: MR = 100 - 2Q

82. The deadweight loss from monopoly power is

\$1000.00
b. \$1012.50
\$1025.00
\$1037.50
none of the above

Scenario 8:

Adriana is a monopolist producing green calculators. The average and marginal cost curves and average and marginal revenue curves for her product are given as follows:

AC = Q+(10,000/Q) MC = 2Q AR = 30-(Q/2) MR = 30-Q

83. Refer to Scenario 8. Suppose that the regulatory agency sets your price where average revenue equals average cost. How much profit will Adriana make?

She will lose money and will go out of business.
b. She will break even.
She will make a profit.
none of the above.

84. Refer to Scenario 8. The deadweight loss from monopoly is

0
b. 5
10
25
none of the above

Scenario 9:

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows:

P = 360 - 4Q MR = 360 - 8Q MC = 4Q

85. Refer to Scenario 9. What level of output maximizes the sum of consumer surplus and producer surplus?

0
30
c. 45
60
none of the above

86. Refer to Scenario 9. What is the profit maximizing level of output?

0
b. 30
45
60
none of the above

87. Refer to Scenario 9. At the profit maximizing level of output, what is the level of consumer surplus?

0
b. 1,800
2,700
3,600
4,800

88. Refer to Scenario 9. At the profit maximizing level of output, what is the level of producer surplus?

0
1,800
c. 5,400
7,200
9,600

89. Refer to Scenario 9. At the profit maximizing level of output, what is the deadweight loss?

0
450
c. 900
1,800
none of the above

90. The situation in which buyers are able to affect the price of a good is referred to as ______________ power.

monopoly
c. monopsony
countervailing

91. For a competitive buyer, the marginal expenditure per unit of an input

exceeds the average expenditure per unit.
is less than the average expenditure per unit.
c. equals the average expenditure per unit.
any of the above could be true.

92. Which of the following is true for a competitive buyer?

a. AE=ME.
AE>ME.
AE<ME.
AE greater than or equal to ME.

93. For a monopsony buyer, the marginal expenditure per unit of an input

a. exceeds the average expenditure per unit.
is less than the average expenditure per unit.
equals the average expenditure per unit.
any of the above could be true.

94. A monopsonist will buy _____ units of input than a competitor, and will pay _____ per unit.

a. fewer; less
more; less
fewer; more
more; more

a monopsonist faces an upward-sloping industry supply curve.
a monopsonist pays a different price for each unit purchased.
a monopsonist sets marginal value equal to marginal expenditure.
d. the price that a monopsonist pays depends on the number of units purchased.

Figure 10.3

The marginal value curve and expenditure curves in the aabove are those of a monopsony.

96. Refer to Figure 10.3. What quantity will the monopsonist purchase to maximize profit?

Q1
Q2
c. Q3
Q4
none of the above

97. Refer to Figure 10.3. What price will the monopsonist pay when maximizing profit?

P1
P2
P3
P4
e. P5

98. Refer to Figure 10.3. What quantity will be purchased in a competitive market?

Q1
Q2
Q3
d. Q4
none of the above

99. Refer to Figure 10.3. What is the competitive price?

P1
P2
P3
d. P4
P5

100. In an oligopsony market:

there are many buyers and sellers.
there are many buyers and a single seller.
there is a single buyer and many sellers.
d. there are a few buyers and many sellers.
there are a few buyers and a few sellers.

Section 10.6

101. In a bilateral monopoly, equilibrium price will

favor the seller.
approximate the competitive equilibrium price.
d. not be determined by a simple rule.

102. In a market with a bilateral monopoly:

a. there is a single buyer and a single seller.
there are many buyers and a single seller.
there is a single buyer and few sellers.
there are a few buyers and many sellers.
there are a few buyers and a few sellers.

103. The degree of monopsony power that a firm enjoys is determined by

elasticity of market demand, elasticity of market supply, and number of buyers in the market.
b. elasticity of market supply, number of buyers in the market, and how buyers interact.
number of buyers in the market, how buyers interact, and number of sellers of the resource.
how buyers interact, number of sellers of the resource, and elasticity of market demand.

104. The percentage "markdown" due to monopsony power is equal to

(P - MC)/P
1/ED
c. (MV - P)P
P[1 + (1/ED)]

105. The following diagram shows marginal value and expenditure curves for a monopsony. In moving from the competitive price and quantity to the monopsony price and quantity, the deadweight loss from monopsony power is the area:

ACDF
CDE
EDG
d. FDG
BCDG

106. Which of the following is true of the antitrust laws in the United States? They are

designed to make the business environment more equitable.
b. designed to promote a competitive economy.
deliberately written in a way to make clear to all what is and what is not allowed.
deliberately written in a language to promote cooperation among businesses.

107. Predatory pricing is defined to be

collusive pricing.
b. behavior designed to drive out current competition.
cooperative behavior between two firms with monopoly power.
collusion.

108. Which of the following is not an important antitrust law?

the Sherman Act of 1890
the Clayton Act of 1914
c. the Consumer Protection Act of 1932
the Federal Trade Commission Act of 1914
None of the above are antitrust laws.