Chapter 12: Managerial Decisions for Firms with Market Power
Chapter 12: MANAGERIAL DECISIONS FOR FIRMS WITH
MARKET POWER
Multiple Choice
12-1 Which of the following is a characteristic of a monopoly market?
a. one firm is the only supplier of a product for which there are no close substitutes
b. entry into the market is blocked
c. the firm can influence market price
d. all of the above
12-2 In a monopoly market,
a. other firms have no incentive to enter the market.
b. profits will always be positive because the firm is the only supplier in the market.
c. the demand facing the firm is downward-sloping because it is the market demand.
d. a and b
e. none of the above
12-3 A monopolist
a. can raise its price without losing any sales because it is the only supplier in the market.
b. can earn a greater than normal rate of return in the long run.
c. always charges a price that is higher than marginal revenue.
d. both a and b
e. both b and c
12-4 A firm with market power
a. can increase price without losing all sales.
b. faces a downward-sloping demand curve.
c. is the only seller in a market.
d. both a and b
e. all of the above
Chapter 12: Managerial Decisions for Firms with Market Power
12-5 One method of measuring the extent of a firm’s market power is
a. the Lerner index.
b. price elasticity of demand for the firm’s product.
c. income elasticity of demand for the firm’s product.
d. both a and b
e. all of the above
12-6 In a monopolistically competitive market,
a. firms are small relative to the total market.
b. no firm has any market power.
c. there is easy entry and exit in the market.
d. a and b
e. a and c
12-7 Which of the following would indicate a relatively large amount of market power?
a. Highly price elasticity demand
b. Low cross-price elasticity with other products
c. Low Lerner index
d. all of the above
e. none of the above
12-8 A monopolistic competitor is similar to a monopolist in that
a. both have market power.
b. both earn positive economic profit in the long run.
c. both produce the output at which long-run average cost is at a minimum.
Chapter 12: Managerial Decisions for Firms with Market Power
d. a and b
e. all of the above
12-9 Refer to the following table showing a monopolist’s demand schedule:
Price
Quantity
$50
300
40
600
20
800
10
1,000
What is marginal revenue for a price decrease from $50 to $40?
a. $9,000
b. $24,000
c. $30
d. $20
e. $40
12-10 Refer to the following table showing a monopolist’s demand schedule:
Price
Quantity
$50
300
40
600
20
800
10
1,000
If price falls from $20 to $10, then
a. MR = −$10, and demand is inelastic.
b. MR = $10, and demand is elastic.
c. MR = $30, and demand is elastic.
d. MR = −$30, and demand is inelastic.
e. none of the above
Chapter 12: Managerial Decisions for Firms with Market Power
12-11 Refer to the following figure showing demand and marginal revenue for a monopoly.
At any price above $______ demand is elastic.
a. $5
b. $10
c. $15
d. $20
e. zero
12-12 Refer to the following figure showing demand and marginal revenue for a monopoly.
Chapter 12: Managerial Decisions for Firms with Market Power
If production costs are constant and equal to $10 (i.e., LAC = LMC = $10), what price will the
monopoly charge?
a. $5
b. $10
c. $15
d. $20
e. $25
12-13 In a monopolistically competitive market,
a. a firm has market power because it produces a differentiated product.
b. a firm earns economic profits in the long run because it has market power.
c. there are a large number of firms.
d. both a and b
e. both a and c
12-14 Monopolistic competition is similar to perfect competition in that:
a. there are a large number of firms
b. firms earn economic profits in the long run
c. firms face downward-sloping demand curves
d. both a and b
e. all of the above
12-15 A monopoly is producing a level of output at which price is $80, marginal revenue is $40,
average total cost is $100, marginal cost is $40, and average fixed cost is $10. In order to
maximize profit, the firm should
a. produce more.
b. keep output the same.
c. produce less.
d. shut down.
Chapter 12: Managerial Decisions for Firms with Market Power
12-16 The following figure shows the demand and cost curves facing a firm with market power in the
short run.
The profit-maximizing level of output is
a. 60 units.
b. 70 units
c. 80 units
d. 90 units.
e. 100 units.
12-17 The following figure shows the demand and cost curves facing a firm with market power in the
short run.
Chapter 12: Managerial Decisions for Firms with Market Power
The firm will sell its output at a price of
a. $2.
b. $3.
c. $3.75.
d. $5.
e. $6.
12-18 The following figure shows the demand and cost curves facing a firm with market power in the
short run.
The firm earns profits of
a. $ 75.
b. $120.
Chapter 12: Managerial Decisions for Firms with Market Power
c. $150.
d. $180.
e. $300.
12-19
The above graph shows the demand and cost conditions facing a price-setting firm. When output
is 50 units, what will happen to total revenue if the firm sells another unit of output?
a. Total revenue will increase $13.50.
b. Total revenue will increase $11.00.
c. Total revenue will increase $9.00.
d. Total revenue will increase $6.00.
e. none of the above
Chapter 12: Managerial Decisions for Firms with Market Power
12-20
The above graph shows the demand and cost conditions facing a price-setting firm.
The firm will produce _____ units of output and charge a price of _____.
a. 40, $8
b. 50, $9
c. 60, $10
d. 50, $6
e. none of the above
12-21
The above graph shows the demand and cost conditions facing a price-setting firm.
Chapter 12: Managerial Decisions for Firms with Market Power
What is the maximum amount of profit the firm can earn?
a −$180
b. −$80
c. $60
d. $120
e. none of the above
12-22 A monopolist will maximize profit by producing the level of output at which
a. the firm’s total revenue exceeds total cost by the largest amount.
b. marginal revenue equals marginal cost.
c. the last unit of output produced adds the same amount to total revenue as to total cost.
d. both a and b
e. all of the above
12-23 A profit-maximizing firm with market power will always produce a level of output where
a. demand is elastic.
b. demand is inelastic.
c. price is greater than average total cost.
d. marginal revenue is greater than average total cost.
12-24 A firm with market power is producing a level of output at which price is $8, marginal revenue is
$5, average variable cost is $6, and marginal cost is $10. In order to maximize profit, the firm
should
a. decrease price.
b. increase price.
c. keep price the same.
d. increase output.
e. shut down.
Chapter 12: Managerial Decisions for Firms with Market Power
12-25 A monopolist which suffers losses in the short run will
a. continue to operate as long as total revenue covers fixed cost.
b. raise price in order to eliminate losses.
c. exit in the long run if there is no plant size that will result in economic profit that is
greater than or equal to zero.
d. both a and b
e. both a and c
12-26 Suppose that a profit-maximizing monopolist has a plant of optimal size and is producing a level
of output at which price is $30, average total cost is $55, and average fixed cost is $40. The firm
should
a. operate in the short run.
b. shut down in the short run.
c. exit the market in the long run.
d. continue to operate in the long run.
e. both a and c
12-27 Columns 1 and 2 make up a portion of a monopolist’s production function for a single variable
input, labor. Columns 2 and 3 represent the demand function facing the monopolist over this
range of output:
How much does the fifth unit of labor add to the firm’s total revenue?
a. $1.875
b. $80
c. $150
d. $4,560
e. none of the above
Chapter 12: Managerial Decisions for Firms with Market Power
12-28 Columns 1 and 2 make up a portion of a monopolist’s production function for a single variable
input, labor. Columns 2 and 3 represent the demand function facing the monopolist over this
range of output:
If the monopolist faces a fixed wage rate of $300, how many units of labor will the firm employ?
a. 3 units
b. 4 units
c. 5 units
d. 6 units
e. 7 units
12-29 Columns 1 and 2 make up a portion of a monopolist’s production function for a single variable
input, labor. Columns 2 and 3 represent the demand function facing the monopolist over this
range of output:
If an increase in consumers’ income increases product price by $2 at each level of output, how
many units of labor will the firm employ at a wage rate of $300?
a. 3
b. 4
c. 5
d. 6
e. 7
12-30 Which of the following is true of a monopolist in the long run?
a. The firm will charge a price that is higher than long-run marginal cost.
b. The firm will charge a price that is equal to or greater than long-run average cost.
Chapter 12: Managerial Decisions for Firms with Market Power
c. The firm will produce that level of output at which long-run average cost is minimum.
d. both a and b
e. both b and c
12-31 A firm with market power will maximize profit by hiring the amount of an input at which the
a. last unit of the input hired adds the same amount to total revenue as to total cost.
b. additional revenue from the last unit of the input hired exceeds the additional cost of the
last unit by the largest amount.
c. last unit of the input hired adds the same amount to total output as to total cost.
d. additional output from the last unit of the input hired exceeds the additional cost of the
last unit by the largest amount.
12-32 A monopolist is currently hiring 5,000 units of labor. At this level, the marginal revenue of output
is $10, the (fixed) wage rate is $300, and the marginal product of labor is 50. In order to
maximize profit, the firm should
a. keep the level of employment the same because the firm is earning a profit of $100,000.
b. hire more labor because the next unit of labor increases profit by $500.
c. hire more labor because the next unit of labor increases profit by $200.
d. hire less labor because the last unit of labor added more to total cost ($300) than to total
revenue ($10).
12-33 A firm facing a downward sloping demand curve is producing a level of output at which price is
$7, marginal revenue is $5, and average total cost, which is at its minimum value, is $3. In order
to maximize profit, the firm should
a. decrease price.
b. keep price the same.
c. decrease output.
d. increase price.
e. both c and d
Chapter 12: Managerial Decisions for Firms with Market Power
12-34 A monopolist is producing a level of output at which price is $65, marginal revenue is $35,
average total cost is $35, and marginal cost is $50. In order to maximize profit, the firm should
a. keep output the same.
b. produce less.
c. produce more.
d. decrease price.
e. both c and d
12-35 Refer to the following table which gives the demand and cost data for a price-setting firm:
Price
Output
Total Cost
$ 20
7
$36
19
8
45
18
9
54
17
10
63
16
11
72
15
12
81
What is the profit-maximizing price?
a. $19
b. $18
c. $17
d. $16
e. $15
12-36 Refer to the following table which gives the demand and cost data for a price-setting firm:
Price
Output
Total Cost
$ 20
7
$36
19
8
45
18
9
54
17
10
63
16
11
72
15
12
81
What is the maximum amount of profit that this firm can earn?
a. $104
b. $105
c. $106
d. $107
Chapter 12: Managerial Decisions for Firms with Market Power
e. $108
12-37
The figure above shows the demand and cost curves facing a price-setting firm. What is marginal
revenue when output is 100 units?
a. $10
b. $20
c. $25
d. $30
e. $35
Chapter 12: Managerial Decisions for Firms with Market Power
12-38
The figure above shows the demand and cost curves facing a price-setting firm. At what output is
marginal revenue $20?
a. 100 units
b. 200 units
c. 300 units
d. 400 units
e. 500 units
12-39
Chapter 12: Managerial Decisions for Firms with Market Power
The figure above shows the demand and cost curves facing a price-setting firm. The profit-
maximizing (or loss-minimizing) level of output is
a. 100
b. 200
c. 300
d. 400
e. 450
12-40
The figure above shows the demand and cost curves facing a price-setting firm. In profit-
maximizing (or loss-minimizing) equilibrium, the price-setting firm earns $______ in total
revenue, which is ___________ the maximum possible total revenue of $________.
a. $7,500; equal to; $7,500
b. $8,000; more than; $7,500
c. $7,650; less than; $8,000
d. $8,000; equal to; $8,000
e. $7,500; less than; $8,000
Chapter 12: Managerial Decisions for Firms with Market Power
12-41
The figure above shows the demand and cost curves facing a price-setting firm. The maximum
profit the firm can earn is $________.
a. −$4,500
b. −$1,500
c. $7,500
d. $7,650
e. $8,000
12-42
Chapter 12: Managerial Decisions for Firms with Market Power
The figure above shows the demand and cost curves facing a price-setting firm. In profit-
maximizing (or loss-minimizing) equilibrium, the Lerner index is _____, and the elasticity of
demand is ______.
a. 1 ; −1
b. 0.6; −1.667
c. 0.5; −2.0
d. 0.667; −1.5
e. 1.33; −0.75
12-43
The graph above shows the demand and cost conditions facing a monopolist. What price will the
monopolist set?
a. $20
b. $30
c. $40
d. $50
e. $60
Chapter 12: Managerial Decisions for Firms with Market Power
12-44
The graph above shows the demand and cost conditions facing a monopolist. What is the
maximum profit the monopolist can earn?
a. $10
b. $30
c. $800
d. $1,800
e. $2,400
12-45 A monopolist will
a. always charge a price higher than average cost.
b. always charge a price higher than marginal cost.
c. always produce a level of output at which marginal revenue equals marginal cost.
d. both b and c
e. all of the above
12-46 If a monopolist is producing a level of output at which demand is inelastic, then
a. the firm is not maximizing profit.
b. marginal revenue is positive.
c. total revenue will decrease if the firm produces more output.
d. both a and b
e. both a and c