CHAPTER 26: Monopoly Behavior
TRUE/FALSE
1. Third-degree price discrimination occurs when a monopolist sells output to different people at
different prices but every unit that an individual buys costs the same amount.
2. A monopolist who is able to practice third-degree price discrimination will make greater profits than a
monopolist who is able to practice first-degree price discrimination.
3. A discriminating monopolist is able to charge different prices in two different markets. If when the
same price is charged in both markets, the quantity demanded in market 1 is always greater than the
quantity demanded in market 2, then in order to maximize profits, the monopolist should charge a
higher price in market 1 than in market 2.
4. In a monopolistically competitive industry with zero profits, each firm will produce less than the
amount that minimizes average costs.
5. It is possible that a profit-maximizing monopolist who is able to practice first-degree (perfect) price
discrimination would sell a quantity x such that the demand curve for his product is inelastic when the
quantity sold is x.
6. In order to maximize his profits, a monopolist who practices third-degree price discrimination with
two or more markets should charge higher prices in markets with more inelastic demand functions.
7. A profit-maximizing monopolist is able to practice third-degree price discrimination. If he charges p1
in market 1 and p2 in market 2, where p1 p2, the quantity sold in market 1 must be smaller than the
quantity sold in market 2.
8. A profit-maximizing monopolist practices third-degree price discrimination. If he charges p1 in market
1 and p2 in market 2, where p1 p2, then if the law forced him to charge the same price in both
markets, more would be demanded in market 1 than in market 2.
9. A price-discriminating monopolist charges p1 in market 1 and p2 in market 2. If p1 p2, the absolute
value of the price elasticity in market 1 at price p1 must be smaller than the absolute value of the price
elasticity in market 2 at price p2.
10. A monopolist who is able to practice third-degree price discrimination charges a higher price in the
market that is more elastic.
MULTIPLE CHOICE
1. A monopolist is able to practice third-degree price discrimination between two markets. The demand
function in the first market is q = 500 − 2p and the demand function in the second market is q = 1,500
− 6p. To maximize his profits, he should
a.
charge a higher price in the second market than in the first.
b.
charge a higher price in the first market than in the second.
c.
charge the same price in both markets.
d.
sell only in one of the two markets.
e.
None of the above.
2. A monopolist finds that a person’s demand for its product depends on the person’s age. The inverse
demand function of someone of age y can be written p = A(y) − q, where A(y) is an increasing function
of y. The product cannot be resold from one buyer to another and the monopolist knows the ages of its
consumers. If the monopolist maximizes its profits,
a.
older people will pay higher prices and purchase less of this product.
b.
older people will pay higher prices and purchase more of this product.
c.
older people will pay lower prices and purchase more of this product.
d.
everyone will pay the same price but older people will consume more.
e.
None of the above
3. A monopolist has discovered that the inverse demand function of a person with income M for the
monopolist’s product is p = .002 M − q. The monopolist is able to observe the incomes of its
consumers and to practice price discrimination according to income (second-degree price
discrimination). The monopolist has a total cost function, c(q) = 100q. The price it will charge a
consumer depends on the consumer’s income, M, according to the formula
a.
p = .001 M + 50.
b.
p = .002 M − 100.
c.
p = M 2.
d.
p = .01 M 2 + 100.
e.
None of the above.
4. Wobble’s Weebles is the only producer of weebles. It makes weebles at constant marginal cost
c(where c 0) and sells them at a price of p1 per weeble in market 1 and at a price of p2 per weeble in
market 2. The demand curve for weebles in market 1 has a constant price elasticity of demand equal to
−2. The demand curve for weebles in market 2 has a constant price elasticity equal to −3/2. The ratio
of the profit-maximizing price in market 1 to the profit-maximizing price in market 2 is
a.
2/3.
b.
1/3.
c.
3/2.
d.
3.
e.
dependent on the value of c.
5. A monopolist sells in two markets. The demand curve for her product is given by p1 = 122 − 2x1 in the
first market and p2 = 306 − 5x2 in the second market, where xi is the quantity sold in market i and pi is
the price charged in market i. She has a constant marginal cost of production, c = 6, and no fixed costs.
She can charge different prices in the two markets. What is the profit-maximizing combination of
quantities for this monopolist?
a.
x1 = 58 and x2 = 32.
b.
x1 = 29 and x2 = 30.
c.
x1 = 59 and x2 = 29.
d.
x1 = 39 and x2 = 28.
e.
x1 = 49 and x2 = 40.
6. A monopolist sells in two markets. The demand curve for her product is given by p1 = 141 − 3x1 in the
first market and p2 = 115 − 2x2 in the second market, where xi is the quantity sold in market i and pi is
the price charged in market i. She has a constant marginal cost of production, c = 3, and no fixed costs.
She can charge different prices in the two markets. What is the profit-maximizing combination of
quantities for this monopolist?
a.
x1 = 46 and x2 = 30.
b.
x1 = 51 and x2 = 23.
c.
x1 = 23 and x2 = 28.
d.
x1 = 33 and x2 = 26.
e.
x1 = 43 and x2 = 38.
7. A monopolist sells in two markets. The demand curve for her product is given by p1 = 165 − 3x1 in the
first market and p2 = 233 − 4x2 in the second market, where xi is the quantity sold in market i and pi is
the price charged in market i. She has a constant marginal cost of production, c = 9, and no fixed costs.
She can charge different prices in the two markets. What is the profit-maximizing combination of
quantities for this monopolist?
a.
x1 = 26 and x2 = 28.
b.
x1 = 54 and x2 = 26.
c.
x1 = 36 and x2 = 26.
d.
x1 = 52 and x2 = 30.
e.
x1 = 46 and x2 = 38.
8. A price-discriminating monopolist sells in two separate markets such that goods sold in one market are
never resold in the other. It charges p1 = $5 in one market and p2 = $10 in the other market. At these
prices, the price elasticity in the first market is −1.40 and the price elasticity in the second market is
−0.10. Which of the following actions is sure to raise the monopolist’s profits?
a.
Lower p2.
b.
Raise p2.
c.
Raise p1 and lower p2.
d.
Raise both p1 and p2.
e.
Raise p2 and lower p1.
9. A price-discriminating monopolist sells in two separate markets such that goods sold in one market are
never resold in the other. It charges p1 = $2 in one market and p2 = $8 in the other market. At these
prices, the price elasticity in the first market is −2.20 and the price elasticity in the second market is
−0.10. Which of the following actions is sure to raise the monopolist’s profits?
a.
Lower p2.
b.
Raise p2.
c.
Raise both p1 and p2.
d.
Raise p1 and lower p2.
e.
Raise p2 and lower p1.
10. A price-discriminating monopolist sells in two separate markets such that goods sold in one market are
never resold in the other. It charges p1 = $4 in one market and p2 = $8 in the other market. At these
prices, the price elasticity in the first market is −1.90 and the price elasticity in the second market is
20.30. Which of the following actions is sure to raise the monopolist’s profits?
a.
Raise p2.
b.
Raise p1 and lower p2.
c.
Lower p2.
d.
Raise both p1 and p2.
e.
Raise p2 and lower p1.
11. A monopolist has a constant marginal cost of $2 per unit and no fixed costs. He faces separate markets
in the United States and England. He can set one price p1 for the U.S. market and another price p2 for
the English market. If demand in the United States is given by Q1 = 6,000 − 600p1 and demand in
England is given by Q2 = 2,400 − 400p2, then the price in the United States will
a.
be larger than the price in England by $2.
b.
be smaller than the price in England by $2.
c.
equal the price in England.
d.
be larger than the price in England by $4.
e.
be smaller than the price in England by $4.
12. A monopolist has a constant marginal cost of $2 per unit and no fixed costs. He faces separate markets
in the United States and England. He can set one price p1 for the U.S. market and another price p2 for
the English market. If demand in the United States is given by Q1 = 7,000 − 700p1 and demand in
England is given by Q2 = 3,200 − 400p2, then the price in the United States will
a.
be smaller than the price in England by $1.
b.
be larger than the price in England by $3.
c.
equal the price in England.
d.
be larger than the price in England by $1.
e.
be smaller than the price in England by $3.
13. A monopolist has a constant marginal cost of $2 per unit and no fixed costs. He faces separate markets
in the United States and England. He can set one price p1 for the U.S. market and another price p2 for
the English market. If demand in the United States is given by Q1 = 7,000 − 700p1 and demand in
England is given by Q2 = 1,200 − 200p2, then the price in the United States will
a.
equal the price in England.
b.
be smaller than the price in England by $2.
c.
be larger than the price in England by $4.
d.
be larger than the price in England by $2.
e.
be smaller than the price in England by $4.
14. Roach Motors has a monopoly on used cars in Enigma, Ohio. By installing secret microphones in the
showroom, the friendly salespersons at Roach are able to learn each customer’s willingness to pay and
can therefore practice first-degree price discrimination, extracting from each customer his entire
consumer’s surplus. The inverse demand function for cars in Enigma is P = 2,000 − 10Q. Roach
Motors purchases its stock of used cars at an auction in Cleveland for $500 each. Roach motors will
a.
sell 75 cars for a total profit of $56,250.
b.
sell 150 cars at a price of $300 a car.
c.
sell 150 cars for a total profit of $112,500.
d.
sell 180 cars and make a total profit of $180,000.
e.
shut down since revenue will not cover variable costs.
15. Roach Motors has a monopoly on used cars in Enigma, Ohio. By installing secret microphones in the
showroom, the friendly salespersons at Roach are able to learn each customer’s willingness to pay and
can therefore practice first-degree price discrimination, extracting from each customer his entire
consumer’s surplus. The inverse demand function for cars in Enigma is P = 2,000 − 10Q. Roach
Motors purchases its stock of used cars at an auction in Cleveland for $500 each. Roach motors will
a.
sell 150 cars for a total profit of $112,500.
b.
sell 75 cars for a total profit of $56,250.
c.
sell 150 cars at a price of $300 a car.
d.
sell 180 cars and make a total profit of $180,000.
e.
shut down since revenue will not cover variable costs.
16. Roach Motors has a monopoly on used cars in Enigma, Ohio. By installing secret microphones in the
showroom, the friendly salespersons at Roach are able to learn each customer’s willingness to pay and
can therefore practice first-degree price discrimination, extracting from each customer his entire
consumer’s surplus. The inverse demand function for cars in Enigma is P = 2,000 − 10Q. Roach
Motors purchases its stock of used cars at an auction in Cleveland for $600 each. Roach motors will
a.
sell 140 cars at a price of $300 a car.
b.
sell 70 cars for a total profit of $49,000.
c.
sell 140 cars for a total profit of $98,000.
d.
sell 168 cars and make a total profit of $156,800.
e.
shut down since revenue will not cover variable costs.
17. Bayerische Motoren Werk (BMW) charges a considerably higher price for its automobiles in the North
American market than it does in its home market of Europe. Assuming that the goal of BMW’s pricing
policy is profit maximization, which of the following would be a plausible explanation for BMW’s
pricing policy?
a.
The income elasticity of demand in North America must be greater than 1, making BMWs
a luxury good in North America, and between 0 and 1 in Europe, making BMWs a normal
good there.
b.
The income elasticity of demand in North America must be between 0 and 1, making
BMWs a normal good in North America, and less than 0 in Europe, making BMWs an
inferior good there.
c.
The price elasticity of demand in North America must be greater than 1, making the
demand for BMWs price elastic in North America, and between 0 and 1 in Europe,
making the demand for BMWs price inelastic there.
d.
The income elasticity of demand in both North America and Europe is greater than 1,
since BMWs are a luxury good, but per capita income in North America is much higher
than in Europe.
e.
The price elasticity of demand is greater than 1 in both North America and Europe,
making BMWs price elastic, but it must be higher in Europe.
18. A careful analysis of demand for Bubbles in Strasburg, North Dakota, reveals a strange segmentation
in the market. (Recall Bubbles is the beverage which produces an unexplained craving for Lawrence
Welk’s music. It is produced by the process Q = minR/3, W , where R is the number of pulverized
Lawrence Welk records and W is gallons of North Dakota well water. PR = $1, PW = $5.) If demand for
Bubbles by senior citizens is described by Q0 = 500P−3/2while demand by those under 65 years old is
Qy = 50P−5, how should Bubbles be priced to maximize profits?
a.
$24 for senior citizens and $10 for those younger
b.
$12 for senior citizens and $40 for those younger
c.
$8 for senior citizens and $26.67 for those younger
d.
$11.56 for all citizens of Strasburg
e.
$45 for senior citizens and $18.75 for those younger
19. A careful analysis of demand for Bubbles in Strasburg, North Dakota, reveals a strange segmentation
in the market. (Recall Bubbles is the beverage which produces an unexplained craving for Lawrence
Welk’s music. It is produced by the process Q = minR/4, W , where R is the number of pulverized
Lawrence Welk records and W is gallons of North Dakota well water. PR = $1, PW = $4.) If demand for
Bubbles by senior citizens is described by Q0 = 500P−3/2 while demand by those under 65 years old is
Qy = 50P−4, how should Bubbles be priced to maximize profits?
a.
$12 for senior citizens and $32 for those younger
b.
$12.57 for all citizens of Strasburg
c.
$24 for senior citizens and $10.67 for those younger
d.
$8 for senior citizens and $21.33 for those younger
e.
$48 for senior citizens and $21.33 for those younger
20. A careful analysis of demand for Bubbles in Strasburg, North Dakota, reveals a strange segmentation
in the market. (Recall Bubbles is the beverage which produces an unexplained craving for Lawrence
Welk’s music. It is produced by the process Q = minR/5, W , where R is the number of pulverized
Lawrence Welk records and W is gallons of North Dakota well water. PR = $1, PW = $4.) If demand for
Bubbles by senior citizens is described by Q0 = 500P−3/2 while demand by those under 65 years old is
Qy = 50P−5, how should Bubbles be priced to maximize profits?
a.
$13 for all citizens of Strasburg
b.
$9 for senior citizens and $30 for those younger
c.
$27 for senior citizens and $11.25 for those younger
d.
$13.50 for senior citizens and $45 for those younger
e.
$60 for senior citizens and $25 for those younger
21. Miron Floren, of Lawrence Welk Show fame, now tours the country performing at accordion concerts.
A careful analysis of demand for tickets to Mr. Floren’s concerts reveals a strange segmentation in the
market. Demand for tickets by senior citizens is described by Q0 = 500P−3/2 while demand by those
under 65 years old is Qy = 50P−4. If the marginal cost of a ticket is $3, how should tickets to Mr.
Floren’s concerts be priced to maximize profits?
a.
$9 for senior citizens and $4 for those younger
b.
$12 for senior citizens and $4.50 for those younger
c.
$3 for senior citizens and $8 for those younger
d.
$4.71 for all tickets
e.
$6 for senior citizens and $12 for those younger
22. Miron Floren, of Lawrence Welk Show fame, now tours the country performing at accordion concerts.
A careful analysis of demand for tickets to Mr. Floren’s concerts reveals a strange segmentation in the
market. Demand for tickets by senior citizens is described by Q0 = 500P−3/2 while demand by those
under 65 years old is Qy = 50P−4. If the marginal cost of a ticket is $4, how should tickets to Mr.
Floren’s concerts be priced to maximize profits?
a.
$16 for senior citizens and $6 for those younger
b.
$12 for senior citizens and $5.33 for those younger
c.
$6.29 for all tickets
d.
$4 for senior citizens and $10.67 for those younger
e.
$8 for senior citizens and $16 for those younger
23. Miron Floren, of Lawrence Welk Show fame, now tours the country performing at accordion concerts.
A careful analysis of demand for tickets to Mr. Floren’s concerts reveals a strange segmentation in the
market. Demand for tickets by senior citizens is described by Q0 = 500P−3/2 while demand by those
under 65 years old is Qy = 50P−5. If the marginal cost of a ticket is $3, how should tickets to Mr.
Floren’s concerts be priced to maximize profits?
a.
$15 for senior citizens and $4.50 for those younger
b.
$4.33 for all tickets
c.
$9 for senior citizens and $3.75 for those younger
d.
$3 for senior citizens and $10 for those younger
e.
$6 for senior citizens and $12 for those younger
PROBLEM
1. Disneyland has two possibilities for pricing rides at its theme parks: (1) Set MR = MC for each ride
and charge the maximum price consumers will bear. (2) Charge an admission fee to the theme park but
allow unlimited rides for free. Using graphs, show which pricing scheme is more profitable for
Disneyland.