Practice Problems # 7

Topics covered :

1. Monopoly
2. Natural monopoly
3. Price discrimination

1. A monopolistic firm faces a downward-sloping demand curve because :
(a) there are a large number of firms in the industry, all selling the same product.
(b) the demand for its product is always inelastic.
(c) unlike a competitive firm, the amount a monopolistic firm sells affects the price of the good.
(d) marginal revenue is negative throughout the feasible range of output.

2. Which of the following would not be classified as a barrier to entry for a monopoly?
(a) patent laws
(b) economies of scale
(c) declining marginal revenue curve
(d) franchises or charters

3. Which of the following is NOT true of price discrimination?
(a) Price discrimination will generally result in a lower level of output than would be the case under a single-price monopoly.
(b) Successful price discrimination implies that the producer can separate customers into easily identifiable groups.
(c) Successful price discrimination will provide the firm with higher total revenue than the best single price.
(d) It exists when price differences depend critically on different buyers' evaluations of a product.

4. Use the following statements (#1 - #4) to answer the following question.
(1) minimum long-run average cost occurs at very high levels of output
(2) there is an easily controlled source of supply for a needed natural resource
(3) one firm is able to build up brand loyalty before other firms are able to enter and compete
(4) one firm is able to prevent competitors from acquiring essential technology, such as through patent protection

A natural monopoly is most likely when
(a) (1) only
(b) (2) only
(c) Both (3) and (4)
(d) Both (1) and (3)

5. If a monopolist can perfectly price discriminate, then
(a) it will charge just two different prices in two different markets.
(b) there will be no consumer surplus
(c) it will not give a discount to those who buy in bulk.
(d) the deadweight loss is larger than if it cannot price discriminate.

6. To maximize its profit, the monopolist produces on the portion of its demand where .
(a) elastic ; P=MC
(b) elastic ; MR=MC
(c) inelastic ; P=MC
(d) inelastic ; MR=MC

7. Suppose that a monopolist faces a market demand curve of Q = 50-P and the marginal revenue of MR = 50-2Q.

(a) If the monopolist can produce each unit of his product at constant average and marginal costs of $10, how much will the firm produce to maximize its profit?

(b) What price will it charge?

(c) What is the monopolist's profit at this price and this quantity?
Now, suppose the firm has a total cost function of TC = (Q²/2)-10Q+200 and the corresponding marginal cost function of MC = Q-10. The monopolist is facing the same market demand as before.
(d) What is his profit maximizing level of output?
(e) What price will it charge?
(f) How much profit will the firm earn?

8. The Apex Corporation, a monopolist in the waterproof paint market, sells its water-resistant paint to two distinct types of consumers for two distinct purposes. One type of consumer buys the paint for painting bathrooms. The other types of customer builds model ships and uses Apex's paint for the hulls of the ships. To Apex, the marginal cost of its production is $5 per gallon. Assume that Apex is able to successfully differentiate between its customers.

The demand for paint for bathrooms is Q_B = 5000-500PB and the demand for model ships is Q_S = 95-PS. Apex also knows his marginal revenue for each customer:

MR_B = 10-(Q_B/250), MR_S = 95-2Q_S.

(a) What is the profit-maximizing output level in the paint market for bathroom?

(b) What is the profit-maximizing output level in the paint market for model ships?

(c) If Apex is selling paint to the customers for bathroom at a price of $6 per gallon and at a price of $60 per gallon to the model boat builders, is it maximizing its profit?

(d) If the prices in (c) are not the profit-maximizing prices in this price discrimination, what are the profit-maximizing prices?