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Worksheet (Chapters 10 and 11)
ECN 202
Spring 2007
1. When the demand curve is downward sloping, marginal revenue is
a.
b.
c.
d.
equal to price.
equal to average revenue.
less than price.
more than price.
2. Which of the following is NOT true for monopoly?
a.
b.
c.
d.
e.
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.
At the profit maximizing output, price equals marginal cost.
Scenario 1: 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:
Q  160  4P
TR  40Q  0.25Q 2
MR  40  0.5Q
3. Refer to Scenario 1. How much output will Barbara produce?
a.
b.
c.
d.
e.
0
22
56
72
none of the above
4. Refer to Scenario 1. The price of her product will be _____.
a.
b.
c.
d.
e.
4
22
32
42
72
TC  4Q
MC  4
5. Refer to Scenario 1. How much profit will she make?
a. -996
b. 0
c. 1,296
d. 1,568
e. none of the above
6. 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?
a.
b.
c.
d.
e.
0
4
5.5
6
(b), (c) and (d) all maximize profit.
7.The more elastic the demand facing a firm,
a.
b.
c.
d.
the higher the value of the Lerner index.
the lower the value of the Lerner index.
the less monopoly power it has.
the higher its profit.
8.Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change
would be:
a.
b.
c.
d.
e.
to decrease the price of rice to the Japanese people.
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.
9.Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms?
a.
b.
c.
d.
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.
10.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:
a.
b.
c.
d.
e.
ACDF
CDE
EDG
FDG
BCDG
11. A third-degree price discriminating monopolist can sell its output either in the local market or on an internet
auction site (or both). Having sold all of its output it discovers that the marginal revenue in the
local market is $20 while its marginal revenue on the internet auction site is $30. To maximize
profits the firm should
a.
b.
c.
d.
e.
have sold more output in the local market and less at the internet auction site.
do nothing until it acquires more information on costs.
have sold less output in the local market and more on the internet auction site.
sell less in both markets until marginal revenue is zero.
sell more in both markets until marginal cost is zero.
12.You are the producer of stereo components. There are two markets, foreign and domestic. The two groups of
consumers cannot trade with one another. If your firm practices third-degree price
discrimination, when you have maximized profits, the marginal revenue
a.
b.
c.
d.
e.
in the foreign market will equal the marginal cost.
in the domestic market will equal the marginal cost.
in the domestic market will equal the marginal revenue in the domestic market.
all of the above.
none of the above
13.Under perfect price discrimination, marginal profit at each level of output equal
a.
b.
c.
d.
0
P-AC.
P-MC.
P-AR.
14.The manager of a firm is attempting to practice third degree price discrimination. She has equated the
marginal revenue in each of her markets. By doing this her
a.
b.
c.
d.
profits are maximized.
costs are minimized given her level of output.
revenues are maximized given her level of output.
all of the above.
15.A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an
example of
a.
b.
c.
d.
e.
peak-load pricing.
second-degree price discrimination.
a two-part tariff.
tying.
none of the above.
16.A national chain of bookstores has initiated a frequent buyer program. If you buy a frequent buyer card for
$10, you are entitled to a 10 percent discount on all purchases for 1 year. This practice is an
example of:
a.
b.
c.
d.
e.
peak-load pricing.
intertemporal price discrimination.
two-part tariff.
bundling.
both (a) and (b) are correct.
17.Bundling raises higher revenues than selling the goods separately when
a.
b.
c.
d.
e.
demands for two goods are highly positively correlated.
demands for two products are mildly positively correlated.
demands for two products are negatively correlated.
there is a perfect positive correlation between the demands for two goods.
the goods are complementary in nature.
1.A firm's demand curve is given by P = 500 - 2Q. The firm's current price is $300 and the firm sells 100 units
of output per week.
a.
b.
Calculate the firm's marginal revenue at the current price and quantity using the
expression for marginal revenue that utilizes the price elasticity of demand.
Assuming that the firm's marginal cost is zero, is the firm maximizing profit?
2. Homer's boat manufacturing has a monopoly on boat sales in the region. Homer's marginal cost of the 8th
boat produced is $1,200. He produces only eight boats and can sell all eight boats for $1,500.
The elasticity of demand at this price is -2. Is Homer maximizing profits?
3.Silverscreen Movie Rentals has market power in the previously viewed video sales market. The demand curve
for Silverscreen movies is QD  10  0.4P  P  25  2.5Q. Silverscreen's marginal revenue
function is MR  Q   25  5Q. Silverscreen's marginal cost curve is
MC(Q) = 0.53 + 0.026Q. Determine Silverscreen's profit maximizing price. Calculate
Silverscreen's elasticity of demand at this price. What is Silverscreen's mark-up over marginal
cost as a percentage of price?
4.The local zoo has hired you to assist them in setting admission prices. The zoo's managers recognize that there
are two distinct demand curves for zoo admission. One demand curve applies to those ages 12
to 64, while the other is for children and senior citizens. The two demand and marginal
revenue curves are:
PA = 9.6 - 0.08QA
MRA = 9.6 - 0.16QA
PCS = 4 - 0.05QCS
MRCS = 4 - 0.10QCS
where PA = adult price, PCS = children’s/senior citizen’s price, QA = daily quantity of adults,
and QCS = daily quantity of children and senior citizens. Crowding is not a problem at the
zoo, so that the managers consider marginal cost to be zero.
a.
b.
If the zoo decides to price discriminate, what should the price and quantity be in each
market? Calculate total revenue in each sub-market.
What is the elasticity of demand at the quantities calculated in (a) for each market. Are
these elasticities consistent with your understanding of profit maximization and the
relationship between marginal revenue and elasticity?