Test Bank Chapter 11
Chapter 11—Price and Output Determination: Monopoly and Dominant Firms
MULTIPLE CHOICE
1. Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is
$50 and the price elasticity for magnometers is -4, what is the optimal monopoly price?
Hint: P (1 +1/E) = MC.
a. $37.50
b. $41.25
c. $66.67
d. $75.00
e. $82.50
2. Land’s End estimates a demand curve for turtleneck sweaters to be:
Log Q = .41 + 2.3 Log Y – 3 Log P
where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of import-
ed turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:
a. P = $13.50
b. P = $26.50
c. P = $27.50
d. P = $34.50
e. P = $56.22
3. Declining cost industries
a. have upward rising AC curves.
b. have upward rising demand curves.
c. have -shaped total costs.
d. have diseconomies of scale.
e. have marginal cost curves below their average cost curve.
4. A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 – 3Q.
The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this
monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 – 6 Q. (Pick closest
answer)
a. Q = 10
b. Q = 15
c. Q = 22
d. Q = 37
e. Q = 41
5. Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 – .20•Q and its total cost
function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public Supply is UN-
REGULATED, find Globo’s optimal price.
a. $206
b. $106
c. $56
d. $6
e. $3
6. A monopolist faces the following demand curve: P = 12 – .3Q with marginal costs of $3. What is the
monopolistic PRICE?
a. P = $5.50
b. P = $6.50
c. P = $7.50
d. P = $8.50
e. P = $9.50
7.
8.
9.
10.
11.
12.
7. In natural monopoly, AC continuously declines due to economies in distribution or in production, which
tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost,
then:
a. price would equal average cost.
b. price would exceed average cost.
c. price would be below average cost.
d. price would be at the profit maximizing level for natural monopoly
e. all of the above
8. The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:
a.
at an output greater than the output where average costs are minimized
b.
at an output short of that output where average costs are minimized
c.
at an output equal to industry output under pure competition
d.
a and c
e.
none of the above
9. In the case of pure monopoly:
a.
one firm is the sole producer of a good or service which has no close substitutes
b.
the firm’s profit is maximized at the price and output combination where marginal cost
equals marginal revenue
c.
the demand curve is always elastic
d.
a and b only
e.
a, b, and c
10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.
a.
true
b.
false
11. The demand curve facing the firm in ____ is the same as the industry demand curve.
a.
pure competition
b.
monopolistic competition
c.
oligopoly
d.
pure monopoly
e.
none of the above
12. When the cross elasticity of demand between one product and all other products is low, one is
generally referring to a(n) ____ situation.
a.
oligopoly
b.
monopoly
c.
pure competition
d.
substitution
e.
monopolistic competition
14. Of the following, which is not an economic rationale for public utility regulation?
a.
production process exhibiting increasing returns to scale
b.
constant cost industry
c.
avoidance of duplication of facilities
d.
protection of consumers from price discrimination
e.
none of the above
15. The practice by telephone companies of charging lower long-distance rates at night than during the day
is an example of:
a.
inverted block pricing
b.
second-degree price discrimination
c.
peak-load pricing
d.
first-degree price discrimination
e.
none of the above
16. In the electric power industry, residential customers have relatively ____ demand for electricity
compared with large industrial users. But contrary to price discrimination, large industrial users
generally are charged ____ rates.
a.
similar, similar
b.
elastic, lower
c.
elastic, higher
d.
inelastic, lower
e.
inelastic, higher
17. ____ as practiced by public utilities is designed to encourage greater usage and therefore spread the
fixed costs of the utility’s plant over a larger number of units of output.
a.
Peak load pricing
b.
Inverted block pricing
c.
Block pricing
d.
First degree price discrimination
e.
none of the above
18. Regulatory agencies engage in all of the following activities except _______.
a.
controlling entry into the regulated industries
b.
overseeing the quality of service provided by the firms
c.
setting federal and state income tax rates on regulated firms
d.
setting prices that consumers will pay
e.
none of the above
PROBLEMS
1. The Zinger Company manufactures and sells a line of sewing machines. Demand per period (Q) for a
particular model is given by the following relationship:
Q = 400 − .5P
where P is price. Total costs (including a “normal” return to the owners) of producing Q units per
period are:
TC = 20,000 + 50Q + 3Q2
Express total profits () in terms of Q.
At what level of output are total profits maximized? What price will be charged? What
are total profits at this output level?
What model of market pricing has been assumed in this problem? Justify your answer.
Non-discriminating monopolist, since the demand curve has a steep negative slope.
2. Zar Island Gas Company is the sole producer of natural gas in the remote island country of Zar. The
company’s operations are regulated by the State Energy Commission. The demand function for gas in
Zar has been estimated as:
P = 1,000 − .2Q
where Q is output (measured in units) and P is price (measured in dollars per unit). Zar Island’s cost
function is:
TC = 300,000 + 10Q
This total cost function does not include a “normal” return on the firm’s invested capital of $4 million.
In the absence of any government price regulation, determine Zar Island’s optimal (i)
output level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base.
The State Energy Commission has ordered the firm to charge a price which will provide
it with no more than a 12 percent return on its total assets. Determine Zar Island’s (i)
output level, (ii) selling price, and (iii) total profits under this constraint.
Hint: The roots of the quadratic equation: