Sample Quiz

Multiple Choice

1. A firm with some latitude to set its own price is called a price

a. setter.

b. taker.

c. maximizer.

d. discriminator.

e. chooser.

2. Which of the following is NOT a type of imperfect competition?

a. pure monopoly

b. natural monopoly

c. oligopoly

d. monopolistic competition

e. all of the above are types of imperfect competition

3. The demand curve for a monopolist is

a. downward sloping.

b. horizontal.

c. vertical.

d. equal to the marginal revenue curve.

e. upward sloping.

4. Market power refers to a firm's ability to

a. set price.

b. lower costs.

c. produce output.

d. control sales.

e. eliminate rivals.

5. Which of the following can lead to market power?

a. economies of scale

b. exclusive control over inputs

c. patents

d. government licenses

e. all of the above

6. With economies of scale

a. average cost declines as output increases.

b. marginal cost declines as output increases.

c. output doubles when inputs double.

d. all of the above

e. none of the above

7. A monopoly that results due to economies of scale is called a(n) ___________ monopoly.

a. imperfect

b. pure

c. scale

d. natural

e. cost

8. A patent

a. lasts 15 years.

b. is granted by a private corporation.

c. permanently protects the patent holder from competition.

d. allows firms to recoup research costs.

e. all of the above

9. A monopolists marginal revenue

a. is below price.

b. can be negative.

c. can be derived from the demand curve.

d. is half of quantity demanded when price is 0.

e. all of the above

10. Charging different prices to different consumers for the same good is an example of

a. monopolization

b. increasing returns to scale

c. price discrimination

d. perfect competition

e. monopolistic competition

Problems/Short Answer

1. You own and operate a t-shirt stand. Your demand curve is given by P = 60 - .25Q. Your marginal cost curve is MC = 10. Your fixed costs equal $300.

a. Graph you demand and marginal cost curves.

b. Derive and graph your marginal revenue curve.

c. Calculate and profit maximizing price and quantity and show them on your graph.

d. Calculate your profit.

e. Calculate consumer surplus at the profit maximizing P and Q.

1. You decide to open a lemonade stand outside your dorm on a hot summer day. You know the distribution of reservation prices for the people who will walk by your stand each day (given in the table below). Each cup of lemonade costs you 30 cents to produce and you have no fixed costs.

Person Reservation Price

A 1.10

B 1.00

C .90

D .80

E .70

F .60

G .50

H .40

I .30

J .20

____________________________

a. Calculate the marginal revenue of selling each additional cup of lemonade.

b. What is your profit maximizing price?

c. At the profit maximizing price, what are profit and consumer surplus?

d. What price should you charge to maximize total economic surplus?

e. How could you use price discrimination to increase your profits? If you use perfect price discrimination, how does profit compare to total economic surplus?