Economics 172 Name:

Spring 2006 Quiz 9

1. A monopoly will never operate in the inelastic part of its demand curve because

a. average revenues are negative there.

b. it would imply a negative marginal cost

c. total revenue is still rising as output rises

d. demand for a monopolist’s product is never inelastic, no matter what the price

If demand is inelastic, MR = P(1+1/e) and if -1 < e < 0 then MR < 0 , which means MC must be < 0.

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.

b. a monopolist will always earn short run economic profits; a perfectly competitive firm never will.

c. a monopolist has the power to change its price by changing output, a perfectly competitive firm cannot change its price.

d. a monopolist has the power to set its price and output level at whatever it wants; a competitive firm can only set its output level.

A is not true. B can be true, but it says always and never. C is true. For d, the monopolist can set price or output, but not both.

3. If a monopoly discovers that the demand for its output has become more elastic at the original output level, then it will respond by

a. producing more and setting a higher price.

b. setting a lower price.

c. setting a higher price.

d. producing more while leaving price unchanged.

e. asking a question like this on an economics quiz.

If demand becomes more elastic, price will fall.

4. A justification for patents is that without patents consumer surplus would be

a. larger than with the patent.

b. zero since the product would not be invented.

c. only slightly smaller than with the patent.

d. zero since the monopoly would be a revenue maximizer.

The argument for monopolies which are based on government enforced patent protection is that society gets goods that would not be invented without the institution of patents.

5. 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.

b. a surplus will exist.

c. producer surplus is maximized.

d. consumer surplus is maximized.

The result, as we showed in class, will be a shortage.