Download Lab 11 1. The following are four differences between monopoly and

Lab 11
1. The following are four differences between monopoly and perfect competition. Which
of these is INCORRECT?
A) A monopolist has market power while a perfect competitor does not.
B) Unlike a perfectly competitive firm, a monopoly can make positive economic
profits in the long run.
C) A monopoly will charge a higher price and produce a smaller quantity than a
competitive market with the same demand and cost structure.
D) Monopoly profits can continue to exist in the long run, because the monopoly
produces more and charges a higher price than a comparable perfectly competitive
industry.
2. Critics of the Canadian Interuniversity Sport (CIS) (formerly the Canadian
Interuniversity Athletic Union (CIAU)) argue that the CIS monopolizes college athletics
and prevents student-athletes from earning money while in college. If this is true, what
type of entry barrier does the CIS have?
A) a patent
B) a copyright
C) control of a scarce resource or input
D) economies of scale
3. Wendy has a monopoly in the retailing of motor homes. She can sell 5 per week at
$21,000 each. If she wants to sell 6, she can charge $20,000 each. The quantity effect
of selling the sixth motor home is:
A) $20,000.
B) $10,000.
C) $15,000.
D) $21,000.
4. Mr. Porter sells 10 bottles of champagne per week at a price of $55 per bottle. He can
sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity and the
price effects on total revenue would be, respectively:
A) an increase of $450 and a decrease of $500.
B) an increase of $495 and a decrease of $550.
C) an increase of 1 bottle and a decrease of $5.
D) an increase of $45 and a decrease of $100.
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5. Bob owns a trout farm with monopoly power in Northern British Columbia. For Bob,
his optimal output occurs where _______. Also, because of monopoly power, Bob's
supply curve _______.
A) marginal revenue equals marginal cost; does not exist
B) marginal revenue exceeds marginal cost; does not exist
C) marginal revenue equals marginal cost; is upward-sloping
D) marginal revenue exceeds marginal cost; is perfectly inelastic
6. Suppose Professor Dumbledorr's magic hat monopoly is broken up and the magic hat
industry becomes perfectly competitive. We would expect the _______ to increase from
the breakup and _______ to decrease from the breakup.
A) producer surplus; consumer surplus and total surplus
B) consumer surplus; producer surplus and total surplus
C) consumer surplus and total surplus; producer surplus
D) producer surplus and total surplus; consumer surplus
7. A natural monopoly is one that:
A) monopolizes a natural resource, such as a mineral spring.
B) is based on control of something occurring in nature (such as diamonds).
C) has economies of scale over the entire relevant range of output.
D) typically has low fixed costs, making it easy and “natural” for it to shut out
competitors.
8. Many airlines offer discounts for travelers who book their flights early. This is an
example of _______ that is _______ in Canada.
A) market power; illegal
B) single-price monopoly power; legal
C) price discrimination; illegal
D) price discrimination; legal
9. A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the
same and the firm does not shut down. Compared to before the increase in marginal
costs, the monopolist will _______ its price and _______ its level of production.
A) raise; decrease
B) not change; decrease
C) raise; increase
D) lower; increase
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10. Which of the following is a barrier to entry for monopoly?
A) control of an input essential for production
B) government-created barriers such as patents
C) the existence of significant economies of scale
D) All of the above are barriers to entry.
Multiple Choice Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
D
C
A
D
A
C
C
D
A
D
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Short Answer Question
The movie theatre in Kingston serves two kinds of customers: students and professors. There are
900 students and 100 professors in Kingston. Each student’s willingness to pay for a movie
ticket is $5. Each professor’s willingness to pay for a movie ticket is $10. Each will buy at most
one ticket. The movie theatre’s marginal cost per ticket is constant at $3 and there is no fixed
cost.
a. Suppose the movie theatre cannot price-discriminate and needs to charge both students and
professors the same price per ticket. If the movie theatre charges $5 who will buy movie tickets
and what will the movie theatre’s profit be? How large is consumer surplus?
b. If the movie theatre changes a price of $10, who will buy movie tickets and what will the
movie theatre’s profit be? How large is consumer surplus?
c. Now suppose that, if it chooses to, the movie theatre can price-discriminate between students
and professors by requiring students to show their student ID. If the movie theatre charges
students $5 and professors $10, how much profit will the movie theatre make? How large is
consumer surplus?
Short Answer Solutions
a. if the movie theatre charges $4 per ticket both students and professors will buy tickets. The
movie theatre will sell to 1,000 customers at a price of $5 each. Since the movie theatres cost
per ticket is $3 its profit is $2 per ticket for a total profit of 1,000 x $2 = 2,000. Students will
experience no consumer surplus, and each of the 100 professors experiences consumer surplus s
of $10 - $5 = $5 for a total consumer surplus of 100 x $5=\ $500.
b. If the movie theatre charges $10 per ticket, only professors will buy tickets. The movie theater
will sell to 100 customers at a price of $100 each. . Since the movie theatres cost per ticket is $3
its profit is $7 per ticket for a total profit of 100 x $7 = $700. Each of the 100 professors
experiences no consumer surplus. Consumer surplus = 0
c. If the move theater charges a price of $5 to students, it sells 900 student tickets at a profit to
the theatre of $5-$3 = $2 each, for a profit from selling to students of 900 x $2 = $1,800. And
charging $10 to professors, it sells 100 tickets to professors at a profit to the theatre of $10 - $3 =
$7 each, for a profit from selling to professors of 100 x $7 = $700. The theatre’s total profit
therefore is $1,800 + $700 = $2,500. Since customers are charged exactly their willingness to
pay, there is no consumer surplus.
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