Economics 172 Name:
Fall 2007 Quiz 6
1. A monopoly will never operate in the
inelastic part of its demand curve because
a. average revenues are negative there.
AR = TR/Q so it can’t be negative
b. it would imply operating where marginal cost is negative. True. See class notes. MR = 1+(1/e) and if
demand is inelastic 1/e<-1 so 1+(1/e)< 0 which means MR < 0 which
means MR=MC implies MC < 0
c. at that output level average fixed cost is rising. AFC
can never be rising as output rises.
d. demand for a monopolist’s product can never be inelastic, no matter what
the price. Sure it can; just
not over the price range that the monopolist will charge.
2. A major difference between a monopolist and a
perfectly competitive firm is that
a. the marginal cost curve for a monopolist always is downward sloping;
for a competitive firm it slopes upward.
No, not always downward
sloping. Sometimes it can be.
b. a
monopolist will always earn short run economic profits; a perfectly competitive
firm never will. It won’t always. Think about the monopolist who was producing
slide rules or buggy whips or telegraph keys.
And a perfectly competitive firm can earn economic profits in the short
run.
c. a
monopolist has the power to change its price by changing output, a perfectly
competitive firm cannot change its price. Yes.
d. a
monopolist has the power to set both its price and output level at whatever it
wants; a competitive firm can only set its output level. A monopolist can’t set both price and
output.
3. When the Civil Aeronautics Board (CAB) regulated the airline industry
a.
it did so because airlines are an example of a natural monopoly.No, they are not.
b.
it prevented airline companies from competing on service quality. That is what they did compete on, as much
as they could.
c.
it resulted in higher average costs than would have occurred
under competition. Yes, regulation
led to increased costs, as the Sen. Kennedy’s Senate Committee found.
d.
it allowed entry into the industry as long as there were no
economic profits earned. No entry was
allowed.
4. If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then
a. a
shortage will exist. Yes, Qd will be greater than Qs.
b. a surplus will exist.
c. producer surplus is maximized.
d. there will be no impact on market price.
5. The total revenue curve for a firm is given by TR = 2Q.
a. the firm is definitely a monopolist.
b. the firm is definitely
not a monopolist. TR =
P x Q and P always is 2, so it is competitive.
c. the firm may be a monopolist.
d. It is impossible for any firm to have this type of revenue curve.