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Microeconomics: Theory and Applications

Edgar K. Browning, Mark A. Zupan

Chapter 11

Monopoly - all with Video Answers

Educators

Chapter Questions

Problem 1

Because they result in higher prices than perfect competition, policymakers often blame monopolies for causing inflation, where inflation is a persistent increase in the general price level. Is it appropriate to assign such blame to monopolies? Explain.

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01:46

Problem 2

Suppose that we, as consumers, have the option of having an AIDS vaccine produced by a monopoly or of not having the vaccine produced at all. Under which option would we be better off? Why?

Evey Z
Evey Z
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08:58

Problem 3

"Because a monopoly is the only source of supply, consumers are entirely at its mercy. There is no limit to the price the monopoly can charge." Evaluate this statement.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
03:04

Problem 4

Why will Disneyland never set its admission price at a level where its demand curve is inelastic? Use the total revenue and total cost curves to illustrate your answer.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator
03:01

Problem 5

At the profit-maximizing output the price of Tommy jeans is twice as high as marginal cost. What is the elasticity of demand? (Hint: Solve $M R=P[1-(1 / \eta)]$ for $\eta$ and remember that $M C=M R$.)

Niamat Khuda
Niamat Khuda
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Problem 6

When a ski resort with some monopoly power is maximizing profit, price is greater than marginal cost. Thus, consumers are willing to pay more for additional lift tickets than the tickets cost to produce. So why does the ski resort not charge a lower price per lift ticket and increase output?

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Problem 7

"A competitive firm will never operate where marginal cost is declining, but a monopoly may." True or false? Explain.

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Problem 8

Show how the most profitable output and price are determined for a monopoly that can produce its product at zero cost $(M C=A C=0)$. Explain the deadweight loss that exists in this case.

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Problem 9

Draw a diagram to show the deadweight loss of a monopoly with a marginal cost curve that is vertical at the profitmaximizing output level.

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Problem 10

"The concept of opportunity cost teaches us that producing more of any good, including a good produced by a monopoly, means that we must produce less of other goods. Thus, there is no objective basis for saying that an increase in a monopolist's output is worthwhile." Evaluate this statement.

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04:11

Problem 11

Suppose that there is a single seller of gasoline in a particular town. Suppose that policymakers, outraged by the prices charged by this monopoly seller, impose a price ceiling. Will the seller's output increase? Explain your answer.

Jiapeng Guo
Jiapeng Guo
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Problem 12

"Since the shutdown condition applies only to competitive firms, it is not a relevant factor when considering what profit-maximizing output level a monopolist such as Amazon should produce." Explain why you agree or disagree with this statement.

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Problem 13

Suppose that the $M C$ faced by Skechers is a constant $$\$ 10$$ per shoe. If the demand elasticity for Skechers shoes is also constant and is equal to 5, what price should Skechers charge for its shoes?

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Problem 14

Suppose that the (inverse) market demand curve for a new drug, Adipose-Off, designed to painlessly reduce body fat, is represented by the equation $P=100-2 Q$, where $P$ is the price in dollars per dose and $Q$ is the annual output. (The marginal revenue curve is thus given by the equation $\mathrm{MR}=100-4 Q$.) Suppose also that there is a single supplier of the drug who faces a marginal cost, as well as average cost, of producing the drug, equal to a constant $$\$ 20$$ per dose. What are the monopolist's profit-maximizing output and price? What is the resulting deadweight loss relative to the competitive outcome?

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Problem 15

Suppose that in the preceding problem, the government levies an excise tax of $$\$ 5$$ per dose on the monopolist. What would happen to the monopolist's profit-maximizing output and price? What would happen to consumer and producer surplus? How much money would the government collect due to the tax? What would be the size of the resulting deadweight loss relative to the competitive outcome?

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01:35

Problem 16

Address all the questions in the preceding problem but assume that instead of a tax of $$\$ 5$$ per dose the government offers a subsidy of $$\$ 5$$ per unit.

Rachel Lepak
Rachel Lepak
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Problem 17

"A monopolist like Spago (a famous Hollywood restaurant frequented by movie stars) can fully pass on all marginal cost increases to its diners through higher prices since it is a price maker and can charge any price it wishes." Do you agree or disagree with this statement? Explain your answer.

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Problem 18

Calculate the Lerner index for the monopoly described in Question 11.14. How would the value of this index change when the tax described in Question 11.15 is imposed on the monopolist? If the subsidy in Question 11.16 is imposed instead?

Rashmi Sinha
Rashmi Sinha
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Problem 19

"A monopoly's marginal cost curve is the monopoly's supply curve." True or false? Explain your answer.

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Problem 20

Explain the determinants of a firm's monopoly power. How can a firm have monopoly power if it is not the sole supplier of a product?

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02:43

Problem 21

Suppose that a monopoly is producing at an output where its average total cost of production is minimized and equals $$\$ 50$$ per unit. If marginal revenue equals $$\$ 60$$, is the monopoly producing at the profit-maximizing output level? Explain why or why not.

Md.Daniyal Arshad
Md.Daniyal Arshad
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03:13

Problem 22

Provide an example of a firm with a Lerner index value of (a) zero and (b) unity. Why does the Lerner index take on a value between these two extremes? Explain why the Lerner index measures a firm's monopoly power.

Md.Daniyal Arshad
Md.Daniyal Arshad
Numerade Educator

Problem 23

Marin County Enterprises has a monopoly on the production of lunar-powered homes and has the normal U-shaped average cost curve. At its present profit-maximizing output and price, it is able to earn a positive economic profit. Graphically show the effects in the product market (output, price, profit, and so on) of each of the following changes:
a. Lunar-powered homes become a nationwide fad.
b. The cost of labor (a variable factor of production) rises.
c. The rent for the firm's office space (a fixed factor of production) rises.
If the Federal Alternative Power Commission can regulate the prices of lunar-powered homes and the promotion of efficiency is the commission's goal, what price should it set? What will happen to the output and profit of Marin County Enterprises as a result?

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Problem 24

The City of Berkeley is currently considering alternative ways of providing cable service to its citizens. Based on an econometric analysis of several recently awarded cable franchises in other cities, economists have determined that the total cost, $T C$, and inverse demand curves for a cable company in Berkeley would be:
$$
\begin{gathered}
T C=2 Q-0.1 Q^2+0.005 Q^3 \text { and } \\
P=20-0.5 Q,
\end{gathered}
$$
where output, $Q$, is measured in thousands and $P$ is the monthly basic tier price.
a. Given this information, what are the equations for the total and marginal revenue curves, and what do these curves look like on a graph?
b. City Councilor A believes the city should own and operate a cable system for the purpose of making as much profit as possible. The profit would be used to lower the city government's deficit. If Councilor A gets her way, what will be the price and output of cable and by how much will the cityowned system be able to reduce the city's deficit?
c. Councilor B believes the city should produce as much cable service as possible without losing money (i.e., the city should provide cable to its citizens on a nonprofit basis). If Councilor B gets his way, what output and price will result?
d. Councilor $\mathrm{C}$ believes that the private sector should provide cable to the city but that the single, private firm that gets the city's franchise should pay 10 percent of its total revenue back to the city in the form of an annual franchise fee. If Councilor $\mathrm{C}$ gets her way and the franchise is awarded to the firm promising to pay the largest franchise fee, what price and output will result? What will be the size of the annual franchise fee?

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Problem 25

Suppose that the Berkeley City Council takes 10 years to award its first cable television franchise for the sake of ensuring that the price the franchised operator charges is as close to average cost as possible. Explain why such a strategy may do less to promote consumer surplus than the alternative strategy of awarding the franchise right away to an operator who will charge a monopoly price.

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Problem 26

The prices of seats on major financial exchanges have plummeted dramatically in recent years. For example, at the Chicago Board of Trade, the world's biggest futures exchange, a membership seat sold for $$\$ 300,000$$ in 2012, down 65 percent from a record of $$\$ 858,000$$ in 1997 . Explain, using a graph, why the decline in the value of such seats may be related to the growth of electronic trading.

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01:02

Problem 27

Movie actors and directors are often paid a percentage of a film's total revenue since revenue is easier to maintain than film studio profit. In light of this, explain why actors and directors are incented to push for a lower price/higher output combination than the one preferred by the studios associated with their films.

Nick Johnson
Nick Johnson
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