Chapter 8: Monopoly and Monopolistic Competition MULTIPLE CHOICE If a monopolist faces a constant-elasticity demand curve given by Q = –3 202,500P and has total costs given by TC = 10Q, its profit-maximizing level of output is: a b c d e 50 60 75 100 120 ANS: B DIF: Moderate REF: 259 TOP: Pricing and Output Decisions in Monopoly MSC: Applied If a monopolist faces a constant-elasticity demand curve given by Q = 400P – and has total costs given by TC = 0.625Q2, its profit-maximizing level of output is: a b c d e ANS: C DIF: Moderate REF: 259 TOP: Pricing and Output Decisions in Monopoly a b c d e MSC: Applied At the profit-maximizing level of output for the monopolist: total revenue is equal to total cost total costs are minimized total revenue is maximized marginal revenue is equal to marginal cost average revenue is equal to average cost ANS: D DIF: Easy REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Factual For the Minnie Mice Company, the elasticity of demand is –6, and the profitmaximizing price is 30 If MC is marginal cost and AVC is average variable cost, then: a MC = 25 b AVC = 25 c MC = 30 d AVC = 36 e MC = 36 ANS: A DIF: Easy REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Applied Bathworks has exclusive rights to sell its perfumes The demand for its perfumes faced by Bathworks is given by Q = 250 – 0.5P Bathworks’s costs are given by TC = 50Q + 5.5Q2 Its maximum monopoly profit is: a b c d e $6,750 $7,050 $7,500 $7,750 $8,750 a b c d e $6,750 $7,050 $7,500 $7,750 $8,750 ANS: A DIF: Easy REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Applied Craig’s Red Sea Restaurant is the only restaurant in Columbia, South Carolina, that sells Ethiopian food The demand for Ethiopian food is given by Q = 25 – P Craig’s costs are given by TC = 25 + Q + 5Q2 Its maximum monopoly profit is: a b c d e –$1 $21 $22 $24 $26 ANS: A DIF: Easy REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Applied My Big Banana (MBB) has a monopoly in Middletown on large banana splits The demand for this delicacy is given by Q = 80 – P MBB’s costs are given by TC = 40 + 2Q + 2Q2 Its maximum monopoly profit is: a b c d e $267 $467 $627 $672 $674 ANS: B DIF: Easy REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Applied For the Mickey Mice Company, the price elasticity of demand is –3, average cost is $15, and marginal cost is $30 Mickey’s profit-maximizing price is: a $10.00 b $20.00 c $22.50 d $30.00 e $45.00 ANS: E DIF: Easy REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Applied Cal’s Cab Company (CCC) has a taxi monopoly in Wen Kroy The demand for taxi services in Wen Kroy is given by Q = 1,500 – P CCC’s costs are given by TC = 100 – Q2 + 5Q3 Its maximum monopoly profit is: a b c d e $0 $5,500 $6,600 $7,700 $9,900 ANS: E DIF: Easy REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Applied 10 So long as price exceeds average variable cost, in the model of monopoly, the firm maximizes profits by producing where: a the difference between marginal revenue and marginal cost is maximized b marginal revenue equals price c the difference between price and marginal cost is maximized d price equals marginal cost e marginal cost equals marginal revenue ANS: E DIF: Moderate REF: 261 TOP: Pricing and Output Decisions in Monopoly MSC: Conceptual 11 If Harry Doubleday’s price elasticity of demand is –2, and its profitmaximizing price is $6, then its: a average cost is $3.00 b average cost is $0.33 c marginal cost is $3.00 d marginal cost is $0.33 e average cost is $5.67 ANS: C DIF: Moderate REF: 262 TOP: Pricing and Output Decisions in Monopoly MSC: Applied 12 The Frank Failing Company has an average variable cost of $8, average fixed cost of $16, marginal cost of $12, and elasticity of demand –3 Frank should: a shut down b charge $8 c charge $16 d charge $18 e charge $36 ANS: D DIF: Moderate REF: 262 TOP: Pricing and Output Decisions in Monopoly 13 a b c d e In the model of monopoly, firms produce a: standardized product with considerable control over price differentiated product with considerable control over price standardized product with no control over price differentiated product with no control over price standardized or differentiated product with some control over price ANS: B DIF: Easy REF: 264 TOP: Pricing and Output Decisions in Monopoly 14 a b c d e MSC: Applied MSC: Conceptual In the model of monopoly, there: are many firms producing differentiated products are a few firms producing undifferentiated products are a few firms producing differentiated products are many firms producing undifferentiated products is one firm producing a highly differentiated a are many firms producing differentiated products are a few firms producing undifferentiated products are a few firms producing differentiated products are many firms producing undifferentiated products is one firm producing a highly differentiated product b c d e ANS: E DIF: Easy REF: 264 TOP: Pricing and Output Decisions in Monopoly MSC: Conceptual 15 A firm with no costs producing Q units and charging price P gets a return of r on total assets of A if P equals: a rA b (1 + r)A c (1 + r)A/Q d rA/Q e rAQ ANS: D MSC: Factual DIF: Easy REF: 268 TOP: Cost-Plus Pricing 16 If price P, unit costs C, and quantity Q are known, the markup of markupcost pricing is: a (PQ – CQ)/Q b P – C/Q c (P – C)/Q d (P – C)/C e – (P – C)/Q ANS: D MSC: Factual DIF: Easy REF: 268 TOP: Cost-Plus Pricing 17 Harriet Quarterly wants a 25% return on the $100 of assets she has in her company Her average variable costs are $50 per unit, and she has no fixed costs If she sells 10 units, what price should she charge? a $52.50 b $62.50 c $75.00 d $87.50 e $125.00 ANS: A MSC: Applied DIF: Easy REF: 268 TOP: Cost-Plus Pricing 18 Joe’s T-shirts has costs given by TC = $100 + 3Q, where Q is the number of shirts If Joe charges $5 each, the percentage markup for 100 shirts is: a 20% b 25% c 33% d 50% e 67% ANS: B DIF: Easy REF: 268 TOP: Cost-Plus Pricing MSC: Applied 19 When producing 10 units, Jean has total variable costs of $100, total fixed costs of $100, and assets of $100 She wants a return of 10% What price should she charge? a $11 b $21 c $30 d $210 e $300 ANS: B MSC: Applied DIF: Easy REF: 268 TOP: Cost-Plus Pricing 20 If C is total cost, Q is quantity, P is price, and A is total assets, the target return r is defined by: a (PQ – C)/A b [1 – (P – C)/Q]A c [1 – (P – C)Q]A d (P – C)Q/A e – (P – C)Q/A ANS: A MSC: Conceptual DIF: Easy REF: 268 TOP: Cost-Plus Pricing 21 If elasticity of demand is –2, marginal cost is $4, and average cost is $6, a profit-maximizing markup price is: a $4 b $6 c $8 d $10 e $12 ANS: C DIF: Easy REF: 272 TOP: Can Cost-Plus Pricing Maximize Profit? MSC: Applied 22 If the demand curve is horizontal, the price elasticity used to calculate the profit-maximizing price is: a –10 b –5 c –0 d –1 e infinity ANS: E DIF: Easy REF: 272 TOP: Can Cost-Plus Pricing Maximize Profit? 23 a b c d e ANS: B MSC: Conceptual If ỗ is the elasticity of demand, a profit maximizer sets a markup price of: MC[1/(1 + 1/η)] MC[1/(1 – 1/η)] AC[1/(1 – η)] AC[1/(1 – 1/η)] 1/(1 – η) DIF: Moderate REF: 272 TOP: Can Cost-Plus Pricing Maximize Profit? MSC: Factual 24 If the profit-maximizing markup price is marginal cost times 2, the elasticity of demand must be: a –0 b –1/2 c –1 d –4/3 e –2 ANS: E DIF: Moderate REF: 272 TOP: Can Cost-Plus Pricing Maximize Profit? 25 a b c d e MSC: Applied To maximize profit, the firm must: mark up average variable costs mark up marginal costs mark up average fixed costs set the markup equal to –1/(η + 1) b and d ANS: E DIF: Difficult REF: 272 TOP: Can Cost-Plus Pricing Maximize Profit? MSC: Conceptual 26 If revenues from selling quantities x and y of jointly produced goods X and Y were TRX = 300 – xy + 50x and TRY = 1,000 – xy + 2y, and 10 units of y were produced, then marginal revenue with respect to X would be: a $10 b $20 c $30 d $40 e $50 ANS: C DIF: Easy REF: 273 TOP: The Multiple-Product Firm: Demand Interrelationships MSC: Applied 27 If revenues from selling quantities x and y of jointly produced goods X and Y were TRX = 100 – xy + 2x and TRY = 500 – xy + 3y, then marginal revenue with respect to X would be: a –2 – y b –y c –x(2y + 5) d –(2y + 5) e 2(1 – y) ANS: E DIF: Easy REF: 273 TOP: The Multiple-Product Firm: Demand Interrelationships MSC: Applied 28 If John produces joint products A and B and refuses to sell all the A he produces, then: a A is a high-demand good b A is a low-demand good c A is a high-cost good d A is a low-cost good e John is definitely not profit maximizing a b c d e A is a high-demand good A is a low-demand good A is a high-cost good A is a low-cost good John is definitely not profit maximizing ANS: B DIF: Easy REF: 276 TOP: Pricing of Joint Products: Fixed Proportions MSC: Factual 29 A producer of two fixed proportion outputs A and B, producing QA = QB with marginal revenues MRA and MRB, should equate marginal cost to: a the maximum (MRA, MRB) b the minimum (MRA, MRB) c d MRA, which should equal MRB the horizontal sum of MRA and MRB e the vertical sum of MRA and MRB ANS: E DIF: Easy REF: 276 TOP: Pricing of Joint Products: Fixed Proportions MSC: Factual 30 A producer of fixed proportion goods X and Y (Q = QX = QY) has marginal costs and revenues of MC = 12Q, MRX = 54 – 6QX, MRY = 126 – 12QY The producer should produce how many units? a b 5.25 c d 8.25 e 10 ANS: C DIF: Easy REF: 276 TOP: Pricing of Joint Products: Fixed Proportions 31 a b c d e MSC: Applied When a producer of joint goods refuses to sell all of one good, the producer: is not rational must destroy some of the high-demand good must destroy some of the low-demand good must give away some of the high-demand good must give away some of the low-demand good ANS: C DIF: Moderate REF: 276 TOP: Pricing of Joint Products: Fixed Proportions MSC: Conceptual 32 A producer refuses to sell some of one joint product MRA is the marginal revenue for a low-demand good If the producer were to sell all its production, what would be true of MRA? a MRA = demand for A b c d e MRA = MRA = marginal cost of A MRA < MRA = ANS: D DIF: Moderate REF: 276 TOP: Pricing of Joint Products: Fixed Proportions MSC: Conceptual 33 Fred Stickwick produces fixed proportion goods A and B, with QA = QB, marginal costs MC, and marginal revenues MRA and MRB If demand for A is greater than demand for B, Fred should only: a produce B to the quantity where MRB = b sell B to the quantity where MRB = if MRA is still > MC c produce B to the quantity where MRB = MC sell B to the quantity where MRB = MC d e produce B to the quantity where MRB = MRA ANS: B DIF: Difficult REF: 276 TOP: Pricing of Joint Products: Fixed Proportions MSC: Conceptual 34 Jack O Trades produces joint products A and B with linear demands DA > DB Given MRB is marginal revenue for B and MCB is marginal cost of B, Jack’s total marginal revenue curve changes slope at the quantity where: a MRB = MCB b DB = MCB c d MRB = DB MRB = e DB = ANS: D DIF: Difficult REF: 276 TOP: Pricing of Joint Products: Fixed Proportions 35 isocost curve: a MSC: Conceptual For a producer of joint products X and Y with total costs CX and CY, an isolates CX and CY separately b shows points where CX = CY c d shows points where cost curves are tangent shows points where CX /CY is constant e shows points where CX + CY is constant ANS: E DIF: Easy REF: 278 TOP: Output of Joint Products: Variable Proportions MSC: Factual 36 For a producer of joint products X and Y with total revenue and RY, an isorevenue curve: a isolates RX and RY separately b shows points where RX = RY c d shows points where revenue curves are tangent shows points where RX /RY is constant e shows points where RX + RY is constant a isolates RX and RY separately b shows points where RX = RY c d shows points where revenue curves are tangent shows points where RX /RY is constant e shows points where RX + RY is constant ANS: E DIF: Easy REF: 278 TOP: Output of Joint Products: Variable Proportions MSC: Factual 37 A monopsonist faces a market labor supply curve w = 20 + L, where w is the wage rate and L is the number of workers employed If the firm’s labor demand curve is w = 200 – 4L, what is the optimal wage rate and quantity of labor employed? a w = 50 and L = 30 b w = 56 and L = 36 c w = 80 and L = 30 d w = 104 and L = 32 e None of the above ANS: A MSC: Applied DIF: Easy REF: 281 TOP: Monopsony 38 A monopsonist faces a market labor supply curve w = 40 + 2L, where w is the wage rate and L is the number of workers employed If the firm’s labor demand curve is w = 200 – L, what is the optimal wage rate and quantity of labor employed? a w = 146.7 and L = 53.3 b w = 168 and L = 32 c w = 104 and L = 32 d w = 40 and L = 160 e w = 32 and L = 168 ANS: C MSC: Applied 39 a b c d e ANS: D Competition MSC: Factual 40 a b c d e DIF: Easy REF: 281 TOP: Monopsony In the model of monopolistic competition, there can be short-run: losses or profits, but there must be profits in long-run equilibrium profits, but there must be losses in long-run equilibrium losses or profits, but there must be losses in long-run equilibrium losses or profits, but there must be neither profits nor losses in long-run equilibrium losses, but there must be profits in long-run equilibrium DIF: Easy REF: 283 TOP: Monopolistic In the model of monopolistic competition, firms produce a: standardized product with considerable control over price differentiated product with considerable control over price standardized product with no control over price differentiated product with no control over price differentiated product with some control over price a standardized product with considerable control over price differentiated product with considerable control over price standardized product with no control over price differentiated product with no control over price differentiated product with some control over price b c d e ANS: E Competition MSC: Factual 41 a b c d e DIF: Easy REF: 283 TOP: Monopolistic Firms that produce similar, slightly differentiated products are called a(n): oligarchy oligopoly cabal cartel product group ANS: E Competition MSC: Factual DIF: Easy REF: 283 TOP: Monopolistic 42 So long as price exceeds average variable cost, in the model of monopolistic competition, a firm maximizes profits by producing where: a the difference between marginal revenue and marginal cost is maximized b marginal cost equals marginal revenue c marginal revenue equals price d the difference between price and marginal cost is maximized e price equals marginal cost ANS: B Competition MSC: Conceptual DIF: Moderate REF: 284 TOP: Monopolistic 43 The ABC Company estimates that a newspaper advertising campaign would cost $25,000 and would generate $35,000 in new revenues The firm should begin this campaign as long as: a price elasticity of demand is at least 2.5 (in absolute value) b price elasticity of supply is c price elasticity of demand is at least 1.4 (in absolute value) d marginal cost of production is no more than $25,000 e price elasticity of supply is 1.4 ANS: C Expenditures MSC: Applied DIF: Moderate REF: 286 TOP: Advertising 44 A supplier of fur coats estimates that the price elasticity of demand for its coats is –3.75 The firm has determined that an additional $100,000 in advertising would generate $275,000 in additional revenues You would advise the firm to: a advertise, because the marginal revenues are greater than the cost of advertising b spend only $50,000 on advertising, because the marginal revenue from an additional dollar of advertising is less than $3.75 c abandon the advertising plan, because the demand elasticity is greater than (in absolute value) a advertise, because the marginal revenues are greater than the cost of advertising spend only $50,000 on advertising, because the marginal revenue from an additional dollar of advertising is less than $3.75 abandon the advertising plan, because the demand elasticity is greater than (in absolute value) abandon the advertising plan, because the marginal revenue from an additional dollar of advertising is less than $3.75 advertise, because the fur coats are a luxury item b c d e ANS: D Expenditures MSC: Applied DIF: Moderate REF: 286 TOP: Advertising 45 If a firm in a monopolistically competitive industry is profit maximizing, it should choose its level of advertising such that the marginal revenue of an additional dollar of advertising: a is equal to the elasticity of its demand curve minus b is exactly $1 c increases revenues by $1 d is equal to plus the elasticity of its demand curve e is equal to the elasticity of its demand curve ANS: E Expenditures MSC: Factual 46 a b c DIF: Easy REF: 287 TOP: Advertising Firms advertise in order to: build brand loyalty appeal to the price-sensitive consumers increase the demand elasticities of their loyal customers shift the market supply curve to the left shift the market demand curve to the left d e ANS: A DIF: Easy REF: 288 TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior MSC: Factual 47 a b c d e Firms offer promotions in order to: build brand loyalty appeal to the price-sensitive consumers increase the demand elasticities of their loyal customers shift the market supply curve to the left shift the market demand curve to the left ANS: B DIF: Easy REF: 288 TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior MSC: Factual