BR10A: Bridge: Monopoly
Question 1
Suppose you own the patent for a new type of bicycle light, giving you a monopoly in the industry. If you lower the price of the light from \$10 to \$9, then we know for sure that at the new price,
A. marginal cost is more than \$9.
B. marginal cost is less than \$9.
C. marginal revenue is less than \$9.
D. marginal revenue is more than \$9.
E. None of the above.
Hint
A monopolistic firm, unlike a perfectly competitive firm, has market power and therefore faces a downward-sloping demand curve. What might this imply about revenue obtain through additional sales?Answer
C. marginal revenue is less than \$9. A monopolistic firm, unlike a perfectly competitive firm, faces a downward-sloping demand curve. Therefore, by lowering its price, a monopoly firm attracts new customers. Suppose that by lowering your price on lights from \$10 to \$9, you sell one additional light. However, you will not only sell more output, you will also receive less revenue on all previous units sold, since you will be lowering the price paid by all your customers. This implies that the additional revenue gained through the sale of one additional light---the marginal revenue---will be the price you receive from your new customer (\$9) minus the revenue you lose by lowering your price for all your other customers. Marginal revenue, therefore, is necessarily less than price.Question 2
As new ride-sharing companies compete against taxi companies, which had previously enjoyed monopoly power, what will happen to the price and quantity of transportation services?
A. Prices will fall, and quantity will fall.
B. Prices will rise, and quantity will rise.
C. Prices will fall, and quantity will rise.
D. Prices will rise, and quantity will fall.
Hint
Think of a supply and demand diagram for the market for transportion services. Which curve is affected, with what effect on price and quantity?Answer
C. Prices will fall, and quantity will rise. The emergence of ride-sharing companies increases supply in the transportation services market. The effect will be a fall in price and an increase in quantity.Question 3
In the town of Linsberg, Chuck is the only craft brewer. In the neighboring town of Krugerville, Justin and Tom each run a craft brewery and compete for customers. Which town is likely to have higher prices and greater deadweight loss?
A. Krugervile will have higher prices and greater deadweight loss.
B. Linsberg will have higher prices, and Krugerville will have greater deadweight loss.
C. Krugerville will have higher prices, and Linsberg will have greater deadweight loss.
D. Linsberg will have higher prices and greater deadweight loss.
Hint
Deadweight loss arises from discrepancies between price and marginal cost. Under which market structure is this discrepancy greatest?Answer
D. Linsberg will have higher prices and greater deadweight loss. Chuck in Linsberg is a monopolist. A monopoly firm charges a price above marginal cost, so consumers purchase less of the product than is economically efficient. In other words, the willingness to pay of some individuals exceeds the marginal cost, yet these potentially mutually beneficial transactions do not occur, creating deadweight loss. If there were two suppliers in the market rather than one, each firm would face a more inward-shifted demand curve. Price would then be lower, and the discrepancy between willingness to pay and marginal cost would be less, so that deadweight loss would be smaller. Thus, Linsberg, served by the monopolist Chuck, will have higher prices and greater deadweight loss than Krugerville, served by the competitors Justin and Tom.Question 4
Sean owns the only pool-cleaning service in his town. If he charges \$50 per cleaning, he has 10 weekly customers. If he wants to add an 11th customer, he needs to reduce his price to \$45. What is Sean’s marginal revenue for the 11th customer?
A. \$5
B. \$45
C. \$495
D. -\$5
Hint
Marginal revenue is calculated by comparing the total revenue generated from the sale of a given number of goods/services and the total revenue generated from selling one extra good/service.Answer
D. -\$5 The total revenue for providing cleaning service to 10 customers is \$500. The total revenue for providing cleaning service to 11 customers is \$495. -\$5 is correct because is the difference between \$495 and \$500.Question 5
Dolly’s Backyard BBQ is the only BBQ restaurant in town. Her profit maximizing price is \$10 and serves 50 customers per day. At this quantity, her average total cost is \$7 per customer. How much profit does Dolly earn per day?
A. \$500
B. \$10
C. \$3
D. \$150